Seven Years Later: Wayfair vs South Dakota (Part 4) 

What this is: In June 2018, the Supreme Court overturned existing law on taxing remote sellers with its landmark 5-4 decision in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080. Seven years later, remote sellers continue to navigate the varied state “economic nexus” laws.

What this means: Post-Wayfair, due to the lack of uniformity in state “economic nexus” laws and some states’ modifications of their economic threshold requirements, it is important for remote sellers to track each state’s sales tax laws closely to ensure compliance.

The issue in South Dakota v. Wayfair, Inc. was whether it was constitutional for South Dakota to require remote sellers with no physical presence in the state (such as internet businesses) to collect and remit sales tax on sales made to in-state purchasers.  In finding in South Dakota’s favor, the Supreme Court overturned long-standing precedent requiring sellers to have an in-state physical presence in order for a state to require such sellers to collect and remit sales tax to the state.  The Court effectively replaced the physical presence requirement with an “economic nexus” requirement with regard to remote sellers.

Physical Presence vs. Economic Nexus

Generally, states define “physical presence” as having a retail store, warehouse, inventory, or the regular presence of traveling salespeople or representatives.  Pre-Wayfair, without such physical presence, a state could not impose its sales tax laws on in-state purchases from remote sellers.  Post-Wayfair, the physical presence requirement was replaced with an “economic nexus” requirement when it comes to remote sellers.  This means that states can require remote sellers with no physical presence in the state to collect and remit sales tax on sales made to in-state purchasers if the remote seller’s sales exceed a certain dollar threshold and/or exceed a certain number of transactions annually.  

Seven Years Post-Wayfair

In part 1 of this series from 2018, we stated: “Since the Wayfair decision, many states are indicating that they will enforce existing laws requiring registration for remote sellers who meet certain criteria, and several have enacted new legislation establishing similar provisions. Others will likely consider similar legislation soon.”  Seven years post-Wayfair, we find that 45 states and the District of Columbia have enacted economic nexus laws requiring remote sellers who meet certain economic thresholds to collect and remit sales tax on in-state sales.  

Non-Uniformity Prevails

There is variance among those 45 states and DC regarding the annual threshold amount and/or the definition of economic nexus.  For example, while many states have a $100,000 or 200 or more separate transaction threshold that constitutes their economic nexus, Alabama has a $250,000 and specified activities threshold, while California has a $500,000 sales threshold and no threshold on the number of transactions. And, while no state applied its economic nexus law retroactively (i.e., Pre-Wayfair), states differ on what is meant by “annually”.  For instance, “annually” could either mean a calendar year or a fiscal year or even a prior year.  To add to the complexity, some states have changed their threshold requirements, either by dollar amount or by transaction amount.  For instance, South Dakota, which had a $100,000 or 200 or more separate transaction threshold for economic nexus, removed its transaction threshold altogether as of July 1, 2023.  (It is likely that South Dakota removed its transaction threshold due to confusion over what constituted a “transaction”).

Due to such non-uniformity, remote sellers must closely track the various state economic nexus laws and review their sales activities in each state to ensure compliance with state laws. 

Economic Nexus and “Doing Business” in a Foreign State

All states with sales tax laws require sellers to submit a sales tax registration form to the state’s Department of Revenue.  For remote sellers, in addition to determining whether they will need to collect and remit sales tax in each state where they are selling to in-state purchasers, they also should determine whether their in-state activities require them to qualify to do business in the state. 

Separate from its tax laws, each state in the US has laws requiring business entities (such as Corporations and LLCs) formed in one state to file an Application for Authority or similar document to register or qualify to do business in another state if their activities rise to the level of “doing business” in that “foreign” state.  While most state business entity statutes describe what activities, standing alone, do not rise to the level of “doing business,” those statutes typically do not describe what specific activities would be deemed “doing business”, thereby triggering the requirement that the entity register or qualify to transact business in the foreign state.  Generally, one must look to case law for guidance on what activities, taken together, trigger the need for foreign qualification.  Failure to qualify to do business in a foreign state can result in penalties and other negative consequences. 

In sum, seven years post-Wayfair, remote sellers continue to navigate the varied economic threshold requirements around the country, while also considering the applicability of other state compliance laws.

For further background on the Wayfair case, see our Related Resources below. 

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.