States to watch in the wake of the South Dakota v. Wayfair, Inc. Supreme Court ruling

Updated 6.5.2019 to reflect latest developments in state laws. Please also see our South Dakota v. Wayfair, Inc. resource page for the most up-to-date remote seller sales tax news.

Now that the Supreme Court has ruled in favor of the state in South Dakota v. Wayfair, Inc., many businesses are wondering how the decision will impact their sales and use tax obligations in other states.

The court ruled on June 21, 2018: “Because the physical presence rule of Quill is unsound and incorrect, Quill Corp. v. North Dakota … and National Bellas Hess v. Department of Revenue, Ill., … are overruled.” It vacated the judgement of the Supreme Court of South Dakota — that the state’s economic nexus law is unconstitutional — and remanded the case “for further proceedings not inconsistent with this opinion.”

This is likely to have different effects in different states, and it will take time for states to sort it all out. According to Andy Gerlach, Secretary of the South Dakota Department of Revenue, “the state will offer guidance to out-of-state online retailers after reviewing the opinion.” Similarly, the Minnesota Department of Revenue issued a press release informing taxpayers of the SCOTUS ruling and stating, “We are analyzing the Court’s decision to identify how it affects Minnesota and online retailers, remote sellers, and marketplace providers.” It promised to provide additional guidance within 30 days.

In the meantime, some states should be watched more closely than others. These are states with economic nexus, non-collecting seller use tax reporting, marketplace sales taxes, and cookie (software) nexus. States with affiliate and click-through nexus should also be monitored.

States with economic nexus

South Dakota v. Wayfair, Inc. centered on South Dakota’s economic nexus law, which challenges the physical presence standard upheld by the Supreme Court in Quill Corp. v. North Dakota (1992). Quill held that a state may not tax sales by a seller with no physical presence in the state. Under South Dakota’s economic nexus law, economic activity alone (at least $100,000 in gross revenue or 200 transactions in a year) triggers a tax collection obligation; no physical presence is needed.

In accepting the South Dakota case, the court agreed to reconsider Quill. In ruling in favor of South Dakota, it overturned the physical presence standard upheld by Quill and Bellas Hess (an earlier ruling). This paves the way for states to impose a tax collection obligation on businesses that have no connection to the state other than a certain amount of economic activity.

States that have adopted or considered economic nexus policies similar to South Dakota’s (see chart below), therefore, should be closely watched.

States with non-collecting seller use tax reporting

While the Supreme Court expressly prohibited states from taxing sales by sellers with no physical presence in the state in Quill, it allowed Colorado to impose use tax notice and reporting requirements on non-collecting sellers in Direct Marketing Association v. Brohl (2015).

Since Colorado began enforcing use tax reporting for non-collecting sellers in July 2017, several other states have adopted similar policies. If nothing else, these requirements have proven effective in encouraging non-collecting sellers to register and collect.

Now that the court has ruled in favor of South Dakota, states with and without use tax reporting laws should be monitored. Will states with use tax reporting continue to rely on it? Will those without use tax reporting requirements for non-collecting sellers adopt them?

States with marketplace sales taxes

A growing number of states now require marketplace facilitators like Amazon, eBay, Etsy, and Walmart to collect and remit taxes on behalf of their third-party (marketplace) sellers. To encourage compliance, these states give marketplace sellers a choice: Collect the tax or comply with use tax notice and reporting for non-collecting sellers.

Like all sales and use tax laws, the taxes imposed on marketplace sellers vary by state. Facilitators may have to have a physical presence in the state, like a warehouse or fulfillment center, or they may simply have to do a certain amount of business in the state. Regardless of the specifics, these laws seem to be getting results: Large marketplaces are complying with them in at least two states — Pennsylvania and Washington. Little wonder several other states have adopted this type of law.

It remains to be seen how the Supreme Court’s abrogation of the physical presence standard will impact these laws.

States with cookie (software) nexus

A handful of states maintain an out-of-state business develops a physical presence in a state when it places software or web cookies on in-state computers and devices to enhance or facilitate sales. Like economic nexus laws, state cookie nexus laws have been challenged.

States with these policies in place should be watched now that the Supreme Court has ruled physical presence is not a prerequisite for tax collection. Some of these laws are tied to economic nexus.

We can’t provide tax advice in this blog, but we can share what we know. Read on for a list of state remote sales tax laws as of June 2018. Dates listed are the effective dates of the policy; however, enforcement of the laws may be affected by the recent Supreme Court ruling. We’ll update the list as we know more.   

*States that have considered but did not enact one or more of the above (an unexhaustive list):

• Connecticut: cookie nexus
• Florida: affiliate nexus
• North Carolina: marketplace provider tax
• South Carolina: click-through nexus
• Utah: affiliate and click-through nexus
• Wisconsin: use tax reporting

Learn more about South Dakota v. Wayfair and its fallout here.