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South Dakota-Style Economic Nexus Laws Nationwide blog

South Dakota-Style Economic Nexus Laws Nationwide

South Dakota-Style Economic Nexus Laws Nationwide

On June 21, 2018, the U.S. Supreme Court overturned a decades-old decision upholding the Dormant Commerce Clause barring states from collecting sales tax on mail-order or internet sales to their residents, unless the retailer had a physical presence in the state. In South Dakota v. Wayfair, Inc., the physical presence rule was rejected since Wayfair’s “economic and virtual” connections to South Dakota were seen as sufficient for nexus (the connection between retailer and state that necessitates a tax collection).

South Dakota-Style Economic Nexus Laws Nationwide blog

The original ruling (Quill Corp. v. North Dakota in 1992) took place prior to the height of the internet era; over the years, volume of interstate online sales has grown dramatically, and the Government Accounting office estimates that in 2017 alone the United States lost out on over $13 billion in taxes.

Implications for Retailers

The expansion of state taxing authority under the South Dakota v. Wayfair ruling could have far-reaching consequences for retailers and consumers alike. Before the June 21 ruling, over a dozen states had already adopted economic nexus provisions, though often failed to enforce them due to the physical presence rule. See the table below for a list of states with economic nexus rules.

Protecting Smaller Merchants

However, while the Supreme Court decision lets states impose taxes on businesses based solely on economic and virtual connections, it does not give them carte blanche. In the ruling, the Supreme Court outlines multiple inclusions which “appear designed to prevent discrimination against or undue burdens upon interstate commerce.”

The first provision in the ruling states that the remote merchant must have over $100,000 in gross revenue from South Dakota sales, or at least 200 separate transactions that year, in order to trigger tax collection obligation. The second protective measure ensures that the state may not retroactively enforce the tax obligation. Lastly, South Dakota participates in the Streamlined Sales and Use Tax Agreement, which helps to “assist states as they administer a simpler and more uniform sales and use tax system,” reducing administrative and compliance costs and providing sellers with free sales tax software while protecting them from audit liability. If any state attempts to enforce a remote sales tax policy violating these measures, they could very well face legal challenges.

Time Frame of Implementation

Change is not instantaneous, and full implementation of the decision may take years. A bill which could keep states from taxing the majority of remote sales has already been introduced in Congress, and additional measures which would increase state tax authority have been stuck in committees for quite a while. But although the ruling may not take effect immediately, businesses should not hesitate in developing a plan for their own online retail businesses and ensuring that when state nexus laws do eventually change, they are ready and compliant.

Each of the following states is or soon will enforce its economic nexus laws, as shown in the chart below.

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