Supreme Court Ruling Affects Online Retailers, Without Physical Nexus, to Collect Sales Tax

For the past 25 years, businesses have relied on Quill Corp. v. North Dakota for not imposing sales tax collections when their business lacked an in-state physical presence. After much debate, the highest court ruled in favor of South Dakota on June 21st in South Dakota v. Wayfair, Inc. The Supreme Court stated that Quill is “unsound and incorrect” and declared South Dakota’s economic threshold law as constitutional.

Currently, South Dakota’s law imposes a tax on retailers with 200 transactions or annual in-state sales exceeding $100,000, regardless if the retailer has physical presence. In the past years, states have been working around Quill to impose sales tax collection in various different ways:

  • South Dakota uses an economic nexus model as noted above.
  • Colorado requires retailers to either send a notice every time a customer purchases something explaining that they could possibly owe sales tax, or the retailer would need to collect sales tax themselves.
  • New York uses a click-through nexus model so if a seller had an affiliate in the state that was referring business to the retailer that would result in sales tax nexus.
  • Massachusetts enacted a cookie nexus model in which putting a cookie on someone’s browser or making a sale through an app would create sales tax nexus.

With the new ruling, it is a high possibility that every state may follow South Dakota’s model going forward.

Every customer is responsible for paying use tax. However, it is virtually impossible for states to enforce use tax on every end user. In-state businesses look at this decision as “leveling the playing field” with out-of-state businesses. Out-of-state businesses look at this decision as an administrative nightmare with higher compliance costs.

Wayfair’s decision will definitely spark states to look at their existing law, and critics are already concerned about states abusing the Wayfair decision. We will continue to keep you informed regarding the standard of sales tax nexus.

If you have any questions about state sales tax nexus, we encourage you to contact Brown Schultz Sheridan & Fritz today.


Shawn Thoman, EA

Shawn is a tax manager with Brown Schultz Sheridan & Fritz. He specializes in tax compliance and tax planning services for partnerships and corporations. He also provides multi-state tax planning strategies and compliance services to clients.