Understanding the Economic Nexus Court Ruling
In the Supreme Court ruling in 2018 of South Dakota v. Wayfair (Wayfair), the U.S. Supreme Court overturned a long-standing physical presence standard originally articulated in the 1992 Supreme Court ruling of Quill Corp v. North Dakota (Quill). This change in the taxation of interstate commerce has allowed states to tax more entities than was previously allowed, thus making it more difficult for multi-state entities to be tax compliant.
In 1992, the Supreme Court ruled in favor of Quill stating in order for a state to issue a sales tax (assumed to also include income tax) on an entity, the entity must have physical presence in the state. This can come from workers performing labor in a state to having a warehouse in the state, except when sales personnel would travel into a state only to make a sale. With the creation and the increasingly popular idea of buying and selling goods and services from an online website like Wayfair or Amazon, states noticed their sales and entity income taxes decrease. This is due to the online stores being based in a state that does not impose an income tax and sell to all other states and not pay a tax unless they had a physical presence there.
Due to this, the state of South Dakota added a section to their sales tax code stating entities would have to collect and remit a sales tax if the entity “deliver[ed] more than $100,000 of goods or services into the State or engage in 200 or more separate transactions” in any year. Wayfair, an online website that mostly sells household items such as furniture, did not collect or remit the sales tax due to the Quill case that was decided more than 25 years before. Due to this, the state filed a lawsuit against Wayfair and the case was heard in the U.S. Supreme Court (Court).
After review, the Court overturned the previous ruling in Quill stating that physical presence is not a necessary requirement for a state to impose a sales tax. In going further, the Court stated this not only affected sales taxes, but all taxes including income tax. They also stated the $100,000 in sales or 200 or more separate transactions was enough for a state to impose an income tax filing requirement.
Since the Court ruling, every state but two (Delaware and Missouri) updated their tax code stating physical presence is not required in order for the state to impose an income or sales tax. Further, most states say there must be a certain (a) amount in sales, (b) number of transactions, (c) or a percentage of total sales (which was not listed in South Dakota’s originally studied tax) in order for there to be a filing requirement. This has made filing tax returns more difficult for an entity that collects revenue from customers in a state to not file in it. If you are looking to see which states you are required to file a return in or if you have any other tax questions, contact your DSWD trusted advisor.