Unless you’ve spent the last month living under a rock, you’ve almost certainly heard that the United States Supreme Court recently issued a decision allowing states to impose tax on internet transactions. Wayfair is arguably the most important state tax case to be decided in the past two decades and fundamentally changes the liability for, and collection of, state sales and use taxes. Specifically, on June 21, 2018, the Supreme Court issued its decision in South Dakota v. Wayfair, Inc. (Supreme Court Docket No. 17–494). A copy of the Wayfair decision is available here.
In 1992, the U.S. Supreme Court issued its decision in Quill Corp v. North Dakota, 504 US 298; 112 S. Ct. 1904; 119 L. Ed. 2d 91 (1992) and held that before an out-of-state retailer could be required to collect sales or use tax, the retailer must have a physical presence in the taxing state. Quill involved a mail-order retailer but its holding was also applied to internet retailers. Since that case was decided, internet commerce has exploded, causing the states to complain that they were losing significant tax revenues. In 2015, in Direct Mktg. Ass'n v. Brohl, 135 S.Ct. 1124; 191 L.Ed.2d 97 (2015), Justice Kennedy issued a concurring opinion in which he opined that the Court should examine the continuing vitality of Quill.
The Wayfair decision is the result of South Dakota enacting legislation in response to Justice Kennedy’s concurrence, and in direct contravention of Quill. The legislation required out of state sellers to collect and remit sales tax regardless of whether the seller had a physical presence in the State. Under the law, sellers who sold more than $100,000 of goods or services or had more than 200 separate sales of goods into South Dakota were subject to tax.
In Wayfair, the Supreme Court majority expressly overruled Quill. Writing for the majority, Justice Kennedy acknowledged that South Dakota loses $48 to $58 million annually from lost sales under the Quill physical presence rule. After elaborating on the historical application of the Commerce Clause, the Court held that it was time to abolish the physical presence rule because it created market distortions in a world of booming e-commerce. The Court reasoned that it would be unfair to only tax businesses who have a physical presence in the state because “administrative costs of compliance, especially in the modern economy with its Internet technology, are largely unrelated” to physical presence. Furthermore, because the physical presence rule “produces an incentive to avoid physical presence in multiple States,” the Court reasoned that the rule created market distortions which should not exist.
The Court went on to say that a state tax is valid so long as it applies to activities with a “substantial nexus” to the taxing state. The Court held that the South Dakota legislation easily passed this test because it applied only to sellers who provided at least $100,000 of goods or services, or engaged in over 200 transactions within the State.
Wayfair is a fundamental sea change in sales and use tax law. States are scrambling to provide guidance and update their laws to comply with the decision. Likewise, sellers are now scrambling to try to figure out how to comply with this change. It seems clear that state sales and use tax laws with economic thresholds similar to South Dakota’s are valid. However, there are several issues that must be considered and will undoubtedly be litigated in the future. For example, if a state’s thresholds for imposition of tax is much lower than South Dakota’s thresholds, is that law unconstitutional? For that matter, if a State’s law is silent as to the monetary threshold at which tax is imposed, is that law facially unconstitutional or only unconstitutional as applied to sellers with very few sales into the State? The next six months will be a very busy time for legislators, state treasury officials and taxpayers.
 In fact, the Wayfair decision applies not just to internet transactions but also potentially applies to all remote sales including telephone and catalog sales