U.S. Supreme Court to Hear Challenge to Long-Standing Sales Tax Physical Presence Requirement
March 28, 2018
The United States Supreme Court has announced that it will hear oral arguments in the case of South Dakota v. Wayfair ( "Wayfair") on April 17, 2018. The case will challenge the long-standing U.S. Supreme Court precedent requiring that a taxpayer must have a physical presence in a state before that state can impose a duty on the taxpayer to charge, collect, and remit sales tax.

In accordance with the Commerce Clause of the U.S. Constitution, the U.S. Supreme Court has previously ruled that a taxpayer must have substantial nexus within a state in order to be required to collect sales tax. Substantial nexus has been defined by the court as a taxpayer having an actual physical presence within a state.   However, the emergence of online sales has allowed taxpayers to provide goods to customers without having a physical presence in the customers' states of residence. Accordingly, states have begun to argue that the long-standing physical presence requirement used to determine whether a taxpayer is responsible for collecting tax on its taxable sales should be reexamined.

Several states have passed legislation that apply the concept of "economic nexus" in determining whether a taxpayer is responsible for sales tax.   The economic nexus concept requires only that a taxpayer have an economic benefit and connection with a state and not necessarily a physical presence in that state in order to be responsible for collecting sales tax. 

Currently, as many as 18 states have passed legislation that supports economic nexus or legislation that requires remote sellers to inform their customers of their legal obligation to pay use tax on transactions on which sales tax was not charged. In addition, given the significant changes over the past several years in how businesses provide goods and services, there currently is strong political and economic sentiment that favors a repeal of the physical presence requirement.

Obviously, the application of an economic nexus standard requiring the collection of sales tax is a critical issue for all taxpayers that conduct business over the internet. Studies estimate that as much as $30 billion of sales tax revenue is lost annually by states that don't apply an economic nexus standard for collecting sales tax.

All of these factors make the Wayfair case arguably the most significant state and local tax case that the U.S. Supreme Court has heard in a generation. In W ayfair, a remote internet retailer challenged the state of South Dakota's economic nexus legislation. The South Dakota legislation was found to be unconstitutional by both a state Circuit Court and the state Supreme Court because it violated the physical presence requirement previously established by the U.S. Supreme Court. South Dakota appealed the decision to the U.S. Supreme Court and it has granted certiorari. The oral arguments have been set for April 17 th with a decision promised by June 2018.

Businesses that provide goods and services using the internet should pay close attention to the ultimate outcome of the Wayfair case. If the Wayfair decision is overturned, taxpayers should prepare for the possibility that they may be required to register and ultimately charge, collect, and remit sales taxes on all taxable transactions in those states in which an undefined level of economic level of activity is exceeded. States likely will give taxpayers only a short period of time to come into compliance with economic nexus laws.
Whitley Penn's SALT practice is monitoring this and other significant state and local tax issues and will continue to release new updates as developments occur. If you have any questions or require any additional information in the interim, please feel free to contact either Dallas Packer (214.393.9319) or Josh Graham (214.393.9412).
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