It has been six months since the United States Supreme Court issued its landmark decision in South Dakota v. Wayfair, Inc. We wrote about the Supreme Court’s decision here. As predicted, the Court’s decision has fundamentally changed the sales and use tax landscape. Since June 2018, over 30 states have enacted legislation or issued interpretive guidance adopting new economic nexus laws in light of the Court’s decision. This rapid development has been complicated by a lack of uniformity across state lines; leaving businesses to grapple with a patchwork of new standards and thresholds.
Though uncertainties remain, one thing is clear: the days of passive compliance are over. Businesses can no longer wait for sales tax notices to arrive in the mail before they consider their out-of-state sales tax obligations. To avoid possible financial harm in the form of taxes, penalties and interest, businesses must take immediate and strategic action to determine how new sales tax laws impact their operations and compliance obligations.
This Legal Update is the first installment in a three-part series geared towards helping businesses navigate sales and use tax laws post-Wayfair. In Part One, we discuss how states have responded to the Wayfair decision and highlight key variations across state laws. In Part Two, we take a closer look at Wisconsin’s recently amended sales and use tax statutes. In Part Three, we offer practical advice and tangible action items for businesses moving forward in this Post-Wayfair world.
Background
A state must have a strong connection, also known as “nexus,” to an out-of-state business before it can impose sales and use tax obligations on that business. Previously, physical presence was the law of the land—a business had to have an office, warehouse, employees, or some other physical presence in the taxing state for tax nexus to exist. In 2018, the Supreme Court overturned the decades old physical presence requirement and ruled that states can impose sales tax obligations on out-of-state businesses with no physical presence in the state.
Post-Wayfair, nexus exists for sales tax purposes when a “taxpayer ‘avails itself of the substantial privilege of carrying on business’ in that jurisdiction.” Nexus can still be established by physical presence, but can now also be established by economic or virtual contacts. This new standard, referred to as economic nexus, significantly expands taxpayers’ obligations to report, collect and remit sales tax.
