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Includes Analysis by: Carolynn Kranz, Kranz & Associates PLLC Mark Muntean, Charles Swenson and Iris Kitamura, Kranz & Associates PLLC
This article discusses the impact of the U.S. Supreme Court’s landmark decision in South Dakota v. Wayfair, Inc.1 and provides guidance related to resulting changes. In addition to evaluating the ruling in Wayfair and the precedents that went before it, this article offers a primer on the fundamental concepts of state sales and use tax principles underpinning Wayfair, including substantial nexus, economic nexus, physical and economic presence, the Commerce Clause, the dormant Commerce Clause, and the Due Process Clause.
THE COURT’S RULING IS OF VITAL IMPORTANCE TO TAX practitioners because of its sales and use tax collection impact that will reach large and small companies’ internal processes and compliance systems. Attorneys who represent remote sellers and e-retailers should evaluate the ruling’s implications with respect to their e-retailer clients’ new burdens to record, collect, and remit sales tax from many state and local tax jurisdictions.
The Wayfair ruling overturns prior Supreme Court precedent in Quill Corp. v. North Dakota2 and Nat’l Bellas Hess v. Dep’t of Revenue.3 In the Quill and Bellas Hess decisions, the Court ruled that out-of-state sellers are obligated to collect and remit sales tax on in-state sales only where the company has a physical presence. The Wayfair ruling overturns Quill, with the majority opinion holding that it was the Court’s obligation to make amends for Quill’s unsound and incorrect reading of the Commerce Clause. Conversely, Chief Justice Roberts and his fellow dissenters felt that the Wayfair ruling exemplified a Court that was overstepping its authority, as it should be the responsibility of Congress to change the physical presence standard.
Sales and Use Tax Nexus v. Income Tax Nexus
Nexus means the minimum level of activity a taxpayer must have in a state before that state has the right to tax the taxpayer. For corporate income tax purposes, several states have adopted an economic nexus standard for determining whether an out-ofstate taxpayer is subject to tax on its business income in the state. Economic nexus is premised on a theory of regular and continuous exploitation of the in-state market. Thus, a certain amount of a taxpayer’s business income can be apportioned to the state if the level of activity in that state meets a prescribed threshold, regardless of whether the taxpayer ever sets foot in that state.
To read the full practice note in Lexis Practice Advisor, follow this link.
Mark Muntean, J.D., LL.M. Taxation (Georgetown) is a business and tax lawyer in the San Francisco Bay Area of California with nearly 40 years of experience in federal, state, and international tax matters. He represents clients in connection with IRS and state tax matters, excise tax matters, criminal tax issues, mergers and acquisitions, private equity, and other business law matters. Mr. Muntean is a regular contributor to the Lexis Quarterly Tax Journal, is the co-author of Ballantine & Sterling California Corporate Laws (Matthew Bender), and is the author of Business Organizations: Professional Corporations and Associations (Matthew Bender). Charles Swenson, CPA, PhD, is Professor and Leventhal Research Fellow at the Marshall School of Business at the University of Southern California. He is also the co-founder of IITGDiscover.com. An author of more than 50 articles and books, he is General Editor of Bender’s State Taxation: Principles and Practice (Matthew Bender). Carolynn Kranz is the founder and managing member of Kranz & Associates PLLC (www.saltattorneys.com), a boutique law firm specializing in state and local tax matters in the 50 states and District of Columbia. She is also the founder and managing member of Industry Sales Solutions, LLC, a company that offers a subscription database containing the sales and use taxability of software related transactions. In addition to her sales and use tax expertise, Carolynn has significant experience in state and local income / franchise tax, as well as federal tax matters. Iris Kitamura is an associate at Kranz & Associates, PLLC, a law firm specializing in state and local tax consulting. Iris specializes in state and local tax matters on a multistate basis, particularly in the area of sales and use taxes. She has over 15 years of experience in state and local taxation and contributes to the LexisNexis publication State Tax Guide to Digital Content and Cloud Services, and co-authored “Taxing Software and Cloud Computing: Yesterday’s Law and Today’s Technology,” Tax Analysts Special Report (2011).
For an example on how the concept of nexus for out-of-state retailers has been expanded by a state law that includes a safe harbor threshold, see
> SALES AND USE TAX CONSIDERATIONS (CT)
RESEARCH PATH: Tax > State and Local Tax > Sales, Use, Property, and Local Taxes > Practice Notes
For a discussion on the nexus standard for out-of-state retailers as a result of the increase in online shopping, see
> SALES AND USE TAX CONSIDERATIONS (FL)
For information on how a state can create legislation and regulations to require out-of-state retailers to collect sales taxes, see
> SALES AND USE TAX CONSIDERATIONS (MA)
For a description on the application of a click-through nexus law on out-of-state retailers, see
> SALES AND USE TAX CONSIDERATIONS (NY)
For best practice guidance on when an out-of-state retailer is required to collect and remit sales taxes to a state, see
> SALES AND USE TAX CONSIDERATIONS (OH)
For an exploration on what creates sufficient nexus between a seller and the state to subject the seller to sales tax liability, see
> SALES AND USE TAX CONSIDERATIONS (TX)
RESEARCH PATH: : Tax > State and Local Tax > Sales, Use, Property, and Local Taxes > Practice Notes
1. 201 L. Ed. 2d 403 (2018). 2. 504 U.S. 298 (1992). 3. 386 U.S. 753 (1967).