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November 29, 2022


Economic nexus: Remote sales tax collection after South Dakota v. Wayfair

Leaving the physical-presence test behind for the substantial-nexus text …

The Internet has changed how we shop. We have come a long way from mail-order catalog shopping and while we still go to the main street store or the mall, many people prefer to shop online in the comfort of their homes. When we physically go to the store, we expect to pay state and local sales taxes. When we shop online, most people are not sure, but we often notice that the merchant usually adds sales tax to the transaction for us.

Physical presence no longer required

So, what is the rule when the merchant is physically out-of-state, but selling to you virtually in your living room? For years, the rule was that for a merchant to be subject to collecting sales tax for a state or local taxing authority in the jurisdiction where a consumer lived, the merchant had to have had a physical presence within the state.

U.S. Supreme Court reversed course

The U.S. Supreme Court changed this rule in 2018 in the case of South Dakota v. Wayfair, Inc. In light of the new reality of interstate virtual sales, the court upheld a South Dakota law requiring out-of-state merchants to collect sales tax on sales to South Dakotans once the sellers meet an annual threshold of either $100,000 in sales to South Dakotans or 200 transactions for delivery of services or goods within the state. The law did not require a physical presence within the state.

The court overruled previous cases that had required physical presence for a state to require a remote merchant to collect state sales tax. The new standard is that the remote merchant must have a sufficiently substantial economic nexus – or connection – to the state for the state to be able to require the seller to collect state or local sales taxes.

Not always an easy undertaking

According to an article in Governing, since Wayfair, there are approximately 12,000 sales taxes in the U.S., which suggests that many local governments are collecting in addition to state governments – and no single governmental agency is in charge. This puts quite a burden on businesses to know how much tax to collect on a given transaction and how to submit it to the appropriate tax authority.

Governing explains further that most states have passed laws in line with Wayfair’s embrace of an economic nexus model. Each state sets out its own description of what it considers a sufficient connection with the state economy to trigger a sales tax collection responsibility.

(The Texas Comptroller of Public Accounts provides substantial information on its website about the impact of Wayfair in Texas as well as about sales tax requirements under Texas law.)

Any merchant that does remote selling should get experienced legal guidance about the seller’s sales tax collecting responsibilities in various locations. Of course, computer software and automation must be harnessed to make this duty feasible.

The attorneys at Brown, PC, in Fort Worth, Texas, advise Texas businesses on whether they need to collect tax on sales from out-of-state customers as well as help out-of-state businesses determine whether their nexus to Texas is sufficient to trigger a responsibility to collect sales taxes on remote sales to Texas customers.