By Eugene Kim, Esq./CPA and  John J. Kim, CPA

On June 21, 2018, in South Dakota v. Wayfair, Inc., the U.S. Supreme Court removed the physical presence requirement for states to be able to impose sales and use tax collection obligations on retailers.  Those of you with a retail business (especially e-retailers) should take note that your sales and use tax responsibilities may be expanding in light of the Wayfair decision.

The Physical Presence Requirement 

Under previous Court decisions (with the most recent and related Court decision in Quill Corp. v. North Dakota (1992)), a state was prohibited from requiring a retailer with no physical presence in the state to collect and remit sales and use tax for in-state sales.  “Physical presence”, such as an in-state store, office, warehouse, or permanent or temporary employees in the state was necessary to satisfy the “substantial nexus” requirement of Complete Auto Transit, Inc. v. Brady (1986).  As a result, until the Wayfairdecision, retailers (such as e-retailers) who did not have a physical presence in a state had no sales and use tax obligation in that state.

South Dakota v. Wayfair, Inc.

In the spring of 2016, South Dakota enacted Senate Bill 106 as a direct challenge to Quill.  The South Dakota law requires retailers to collect and remit sales tax if the retailer either (a) delivers more than $100,000 of goods or services into the state or (b) engages in 200 or more separate transactions for the delivery of goods or services there.

Wayfair, an e-retailer, was subject to South Dakota’s sales and use tax obligations under Senate Bill 106, along with other e-retailers with no physical presence in South Dakota.  The Court in Wayfair overturned Quill on the basis that (1) physical presence is not required to satisfy the “substantial nexus” requirement; (2) Quill creates rather than resolves market distortions by creating a tax shelter for businesses with limited physical presence; and (3) the physical presence requirement is a formality that distinguishes the sales tax obligations of similar retailers without making any sense in the age of the internet.

In Light Of The Wayfair Decision

The Wayfair ruling has opened the door for states to impose sales and use tax obligations on online retailers with no physical presence in the state.  Several states have already adopted or implemented an economic-and-virtual-contact-based sales and use tax nexus model that has no physical presence requirement.  Other states are undoubtedly actively analyzing and updating their sales and use tax collection requirements in light of Wayfair.

South Dakota gave us an idea of how sales and use tax obligations can now be imposed without physical presence, but the Court in Wayfair did not provide clear guidance as to what sufficiently constitutes substantial nexus or whether any other principles could invalidate a sales and use tax obligation requirement.  In South Dakota’s case, having sales volume of over $100,000 or 200 or more separate transactions in the state was considered sufficient, but it is still unclear what the new standard is and how other states will apply it.

If you have questions or concerns about how to plan ahead for your business or personal tax issues with regard to various types of taxes such as the sales & use tax described above, please feel free to contact us at: ekim@koruscpas.com or (949) 565-3143.

Eugene Kim is a CPA & attorney who specializes in income tax compliance and planning for individuals and their businesses, as well as compliance for 501(c)(3) and other tax-exempt organizations.  Eugene has more than 12 years of experience in tax accounting and tax law with respect to the formation of public charities and private foundations, obtaining and maintaining their tax-exempt status; and business income taxation and executive compensation in connection with mergers and acquisitions, formation and operation, international transactions and employment matters as well as estate planning.

John J. Kim is a tax associate at KORUS CPAs, LLP who specializes in complex individual and entity taxes including multi-state entities with an interest in transactional advisory services. John moved to Southern California when he started his career in public accounting one year ago after earning a Master’s degree in Accounting from Portland State University in Oregon. John likes hiking and because of the great trails here, Southern California has been heaven for him.