Sales tax compliance post-Wayfair

August 1, 2019

By David L. Brennan Jr. at Journal of Accountancy on August 1, 2019

Sales tax has turned into the Wild West not just for internet retailers, but also for brick-and-mortar stores, manufacturers, and wholesalers alike. With over 10,000 sales tax jurisdictions in the United States, almost any company selling across state lines needs to be analyzing its sales tax compliance. The question is: What are you and your clients doing about collecting sales tax for sales across state lines?


In the 1980s and 1990s, states attempted to get companies to collect sales tax on transactions into the state. These companies were predominantly located out of state and were making sales via mail or telephone calls. The companies were not collecting sales tax on the transactions. The states were less than pleased. One state, North Dakota, passed a law requiring any company engaging in "regular or systematic" solicitation in the state to become registered for and collect sales tax. In 1992, the U.S. Supreme Court held a company needed to have a physical presence (employees, property, or offices) in a state before the state could require the company to collect sales tax. This landmark case was Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

Quill made sales tax compliance easy for companies: If a company was physically present in a state, it had to collect sales tax for that state. If the company was not physically present in a state, it did not have to collect sales tax, although it was inevitable that there would be some controversy about when companies were "present."

The states were unhappy with this line of demarcation but saw no immediate way around it. That is until the internet arrived. Sales slowly began shifting from in person, in store (with mail-order catalog sales a lesser factor) to online. States began to see a dip in sales-and-use tax revenues because many internet sellers, such as Amazon, were physically located outside of most states and only made sales into these states. Since these internet sellers were not physically present in that state, they did not have to collect sales tax on sales into the state. Consumers noticed that sales tax was not due on these internet purchases, and most consumers failed to realize they were required to pay use tax on their internet purchases to their state of residence. And, of course, brick-and-mortar stores began to suffer as they lost sales to online retailers.


Seeing revenues were on the decline, states began adjusting their tax laws or regulations. One-by-one, states devised new requirements to make companies collect sales tax. States enacted various laws or promulgated regulations to creatively find nexus, such as Massachusetts, which taxed sales based on an electronic "cookie" on a computer (830 Mass. Code Regs. 64H.1.7), and New York, which developed so-called click-through nexus, taxing internet sales that were derived from clicking through advertisements on websites (N.Y. Tax Law §1101(b)(8)(vi)).

Most states changing the rules imposed the obligation to collect sales tax based on a new concept: "economic nexus." Broadly, these states claimed that if a seller who is not physically present in the state makes a certain dollar volume of sales or a minimum number of sales transactions to customers in the state, the seller has sufficient nexus with the state for the state to impose an obligation on the seller to collect the state's sales tax.

South Dakota was one state that enacted an economic nexus law (S.D. Codified Laws §10-64-2). The South Dakota law says if a seller makes $100,000 of sales into the state or has 200 or more sales transactions into the state in a calendar year, the seller must collect sales tax. The law did not impose sales taxes retroactively. South Dakota's law was designed to provoke litigation and for the issue it raised to reach the U.S. Supreme Court as quickly as possible. South Dakota pursued four large companies it knew would meet its threshold. Three of those companies sued: Newegg,, and Wayfair.

The case became known as South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018). After rocketing the case through state courts and losing, South Dakota took its arguments to the U.S. Supreme Court and won. Now, physical presence is no longer needed: If a company's activity has substantial nexus with a state, the state can require the company to collect sales tax on sales into the state. Likewise, counties and municipalities can impose the same requirements. What is unclear from the U.S. Supreme Court's decision is how low the threshold can be, as this was not addressed in the decision. All that is known for certain is that $100,000 of sales into a state or 200 sales transactions into a state meets a constitutional threshold for allowing states to require companies to collect sales tax.

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