With the fifth anniversary of Wayfair last week, the fallout from that case has been a hot topic recently. One day before the anniversary, the U.S. Supreme Court issued an order denying cert in Quad Graphics Inc. v. North Carolina Department of Revenue, signaling what will likely be a long hiatus for the Supreme Court to revisit state tax nexus questions. That’s a shame, as there are still many open questions and many state nexus rules are very clearly not within the four corners of Justice Kennedy’s 2018 opinion.
After Wayfair, states rushed to adopt their own economic nexus thresholds that were superficially similar to South Dakota’s. Today, every state with a sales tax has both an economic nexus threshold for remote sellers and has marketplace facilitator rules. These state rules almost uniformly impose a tax collection obligation on remote sellers solely based on the seller exceeding a certain receipts threshold in sales into the state (Connecticut still requires sellers to exceed $100,000 and 200 transactions, but no other state requires both a receipts and transaction amount to be met). Thus, despite the Wayfair decision’s repudiation of a bright line nexus standard, states have simply traded one bright line rule (physical presence) for another (gross receipts in sales into the state).
The problem here is that Wayfair anticipated additional clarification regarding state tax nexus. The decision’s penultimate paragraph begins:
The question remains whether some other principle in the Court’s Commerce Clause doctrine might invalidate the Act. Because the Quill physical presence rule was an obvious barrier to the Act’s validity, these issues have not yet been litigated or briefed, and so the Court need not resolve them here.
The Court went on to note various factors in South Dakota’s law that “appear[ed] designed to prevent discrimination against or undue burdens upon interstate commerce.” First, the underlying current throughout the decision is that “the continuous and pervasive virtual presence of retailers today is, under Quill, simply irrelevant. This Court should not maintain a rule that ignores these substantial virtual connections to the State.” The taxpayers at issue in Wayfair were “large, national companies that undoubtedly maintain an extensive virtual presence.” Moreover, South Dakota’s law applied a safe harbor to those who transact only limited business in South Dakota. The state’s law was not retroactive. Finally, the decision emphasizes South Dakota’s membership in the Streamlined Sales and Use Tax Agreement. The Court noted:
The system standardizes taxes to reduce administrative and compliance costs: it requires a single, state level tax administration, uniform definitions of products and services, simplified rate structures, and other uniform rules. It also provides sellers access to sales tax administration software paid by the State. Sellers who choose to use such software are immune from audit liability.
Despite this language, not a single state requires a “continuous and pervasive virtual presence” in imposing a tax obligation on a remote seller. South Dakota is the fifth smallest state by population, yet the threshold for determining whether a company is conducting “limited business” in the state ($100,000) has been adopted as a bright line rule in states far larger and for which $100,000 in sales could easily be characterized as “limited business.” And although only 23 states are full members of the Streamlined Sales and Use Tax Agreement, the remaining states nonetheless have adopted the same economic nexus rules.
States’ bright-line treatment of their jurisdiction to tax will continue to encroach on interstate commerce and raise due process concerns. We often joke that discussions related to nexus are a waste of time today; everyone has nexus everywhere. But Wayfair explicitly makes it clear that this is not the case. Five years after Wayfair, taxpayers should continue to think critically about the totality of their contacts with a particular state. While the impulse to simply look at the amount of sales made into the state may be strong, Wayfair does not support such a simplistic analysis.