The Supreme Court issued its opinion in South Dakota v. Wayfair, Inc. on June 21, 2018. The closely followed case involved a South Dakota law that required certain out-of-state sellers who sold more than $100,000 of goods or services to South Dakota customers, or engaged in 200 or more separate transactions with South Dakota customers, to collect sales tax. South Dakota enacted the law to provide a basis to challenge the physical presence rule. The physical presence rule precludes a state from requiring an out-of-state seller to collect sales tax if the seller does not have a physical presence in the state. The physical presence rule was established by the Supreme Court in the cases of National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753 (1967) and Quill Corp. v. North Dakota, 504 U. S. 298 (1992). In a narrow 5-4 decision, the Supreme Court overruled Quill and Bellas Hess and found the physical presence rule was unsound and incorrect. States can now require out-of-state sellers to collect sales tax if the seller has substantial nexus with the state and the analysis is done based on all facts and circumstances. The Supreme Court found substantial nexus existed under the South Dakota law because the law only applies to sellers who engaged in a significant amount of business in South Dakota. Many states can now be expected to pass legislation similar to the South Dakota law. Sellers who currently do not collect sales tax because they do not have a physical presence in a state should closely monitor the development of state laws because they may soon be required to collect sales tax. The Supreme Court issued its opinion in South Dakota v. Wayfair, Inc. on June 21, 2018. The closely followed case involved a South Dakota la

Economic nexus was recently the subject of a U.S. Supreme Court case, South Dakota v. Wayfair, in which the Supreme Court ruled in favor of South Dakota stating that economic nexus could be Constitutional, overturning Quill Corp. v. North Dakota, 504 U. S. 298 (1992) and National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753 (1967), which required businesses to have a physical presence in a taxing jurisdiction in order to create nexus for sales and use tax purposes. While the Supreme Court did not create a bright line rule or confirm that the South Dakota economic nexus statute was constitutional per se in Wayfair, it did positively discuss the law and indicated that if other states were to enact similar provisions, they would likely meet the substantial nexus requirements outline in the Commerce Clause.

Farewell To The Physical Presence Rule Upending 51 years of precedent, Wayfair overruled the Court’s physical presence rule as articulated in National Bellas Hess, Inc. v. Department of Revenue of State of Ill. (1967) 386 U.S. 753 and affirmed in Quill Corp. v. North Dakota (1992) 504 U.S. The physical presence rule prohibited states from requiring out-of-state retailers to collect and remit sales tax if the out-of-state retailer did not have a physical presence within the state. As such, the physical presence rule has long been the target of criticism for giving out-of-state businesses an advantage over in-state businesses and resulting in significant revenue losses to the states.

South Dakota v. Wayfair Facing tax revenue shortfalls, South Dakota’s legislature in 2016 enacted emergency legislation requiring out-of-state retailers to collect and remit sales tax on sales to South Dakota residents, regardless of whether the seller had a physical presence in the state. This made the legislation invalid under the Supreme Court’s decisions in National Bellas Hess v. Illinois, 386 U.S. 753 (1967), and Quill Corp. v. North Dakota, 504 U.S. 298 (1992), which held that, absent congressional authorization, states could not require remote sellers with no physical presence in the state to collect and remit taxes on sales to state residents. In an opinion written by Justice Kennedy, the Court in Wayfair overruled Quill and Bellas Hess.

History The 5-4 decision inWayfairoverruled the Supreme Court’s divisive 1992 rule inQuill Corp. v. North Dakota, which states have tried to “kill” for years through lawsuits and regulation. To understand the significance ofWayfair, it is necessary to understand some of the history leading up to it.National Bellas Hess InNational Bellas Hess v. Department of Revenue of Illinois, 386 U.S. 753 (1967), the Supreme Court ruled that a mail-order reseller was not required to collect sales tax unless it had some physical contact with the state. Located in Missouri, National Bellas Hess was a mail-order seller of various consumer products.

ShareOn June 21, the United States Supreme Court held, in South Dakota v. Wayfair, Inc., that a state may require an out-of-state seller with no physical presence in the state to collect and remit the state’s use tax. The Court described as “unsound and incorrect” the physical presence requirement it had established in National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967) and reaffirmed in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Wayfair relied on three features of the South Dakota law that may very well serve as the basis for expedited legislative enactments in other states.

The decision overturned more than 50 years of jurisprudence requiring retailers to have a physical presence in a state before they can be required to collect and remit any sales and use taxes on purchases. See National Bellas Hess v. Department of Revenue of Ill., 386 U.S. 753 (1967) and Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Justice Kennedy wrote the opinion for the Court and was joined by Justices Thomas, Ginsburg, Alito, and Gorsuch.

The Court, by a 5 – 4 majority, held that a vendor need not have a physical presence in a state in order to have a “substantial nexus” with the state under the Commerce Clause that could obligate the vendor to collect sales or use taxes on sales made to customers who reside in the state and to remit those taxes to the state. Consequently, the Court overruled its prior holdings in National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967), and Quill Corp. v. North Dakota, 504 U.S. 298 (1992), that a vendor must have a physical presence in a state to be required to collect sales/use taxes on sales made to residents of that state.To learn what three things you should know about Wayfair and its effect on remote (read: Internet-based) vendors, read on after the jump.What did the Court do?The Court did not hold that the South Dakota law that imposes a sales/use tax collection and remission obligation on certain remote vendors satisfies each prong of the Commerce Clause analysis that applies to a state tax on interstate activity. The Court held that the physical presence requirement adopted by Bellas Hess and Quill for purposes of determining whether a remote vendor has substantial nexus with a state for purposes of sales/use tax collection and remission is no more.

Although the Court's opinion in Wayfair clearly provides new opportunities for states to require out-of-state vendors to collect sales tax, the Court did not delineate a new standard for sales tax nexus, potentially opening up uncertainties in an area that has long had a black-and-white rule.Background In 1962, in National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967), the Supreme Court, relying on the Due Process Clause of the Constitution, decided that a state could require only vendors with a physical presence in the state to collect sales tax from sales to customers in that state. Thirty years later, when given the opportunity to reconsider National Bellas Hess in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), the Court declined to do so and, relying on the Dormant Commerce Clause of the Constitution, again held that the vendor's physical presence in the state was necessary for that state to require the vendor to collect sales tax.

* * *The substantial assistance of summer law clerk Scott Tan in preparing this post is gratefully acknowledged by the authors. [1] National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967). [2] Quill Corp. v. North Dakota, 504 U.S. 298 (1992).