US Supreme Court Overturns Physical Presence Requirement in Landmark Decision

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.

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