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INSIGHT: ‘Wayfair’ One Year Later—Where We Are and What’s Next

Oct. 23, 2019, 1:00 PM

On June 21, 2018, the U.S. Supreme Court, in South Dakota v. Wayfair held that physical presence was not a constitutional requirement for a state to impose sales and use tax responsibilities upon an out-of-state seller. The decision clearly broadened the ability of states to demand tax revenue on interstate sales by out-of-state vendors with only “substantial virtual connections” to a state.

Nearly every state imposing a sales tax has now enacted Wayfair legislation, most using the minimum thresholds in South Dakota of at least annual sales of $100,000 to, or 200 transactions with, buyers in the taxing state. Some states have increased the dollar threshold and eliminated the alternative transaction threshold.

Many states also enacted market place facilitator laws imposing sales and use tax collection and reporting responsibilities on the facilitator (e.g., Amazon or E-Bay) rather than the out-of-state vendors. An administrative law judge has recently upheld South Carolina’s right to require Amazon Services to collect and remit South Carolina sales and use taxes on sales it facilitates for third party out-of-state vendors for sales to South Carolina buyers.

Nevertheless, many unanswered questions remain as to the extent and limits of the Wayfair decision and the collection of sales taxes. Additionally, the Multistate Tax Commission (MTC) and many states are looking at applying Wayfair with respect to income taxes. For example, Public Law 86-272 exempts interstate sales of tangible personal property from state income tax where the only in-state activity is the solicitation of sales where the orders are accepted and delivery of the product occurs outside the state. Some taxing authorities may assert that Internet activities exceed the protected activities relating to solicitation which would eliminate the vendor’s protection from income tax under Public Law 86-272.

This article examines the taxing regime before Wayfair, the states’ reactions to the decision, and likely issues that will continue to evolve in light of Wayfair.

The Physical Presence Standard

Supreme Court precedent for more than half a century in National Bellas Hess Inc. v. Illinois and Quill Corp. v. North Dakotaprior to Wayfair held that a seller was required to have property, people, or some other physical connection to a state for a state to validly compel the seller to collect and remit sales or use tax. With the development of Internet commerce, many states, commentators, and “brick and mortar” retailers viewed the bright line physical presence standard as a loophole permitting Internet sellers to avoid collecting sales tax resulting in a loss in tax revenues to affected governments and a competitive disadvantage for those competing with Internet sellers.

Consequently, states enacted a variety of statutory structures aimed at taxing Internet commerce. These structures included affiliate nexus (asserting that if a person affiliated with a retailer has physical presence with a state, the affiliates nexus is attributed to the retailer), marketplace nexus (treating a marketplace facilitator as the seller of goods of third parties using a marketplace platform), “cookie” nexus (asserting that an out-of-state vendor’s “cookies” on a buyer’s in-state computers constituted a physical presence), and notice reporting (requiring out-of-state sellers to notify customers that they must report and pay use tax on all interstate sales)

Several states, despite Quill, enacted economic nexus statutes asserting the right to compel sales/use tax responsibilities on out-of-state sellers based purely on a level of economic activity. One such state was South Dakota, a signatory to the Streamlined Sales and Use Tax Agreement (SSUTA), which enacted a statute asserting that an out-of-state seller with South Dakota on a prospective basis if the seller, in the current or prior calendar year: (1) had gross revenue from the sales of taxable goods and services in South Dakota exceeding $100,000; or (2) sold taxable goods and services for delivery in South Dakota in 200 or more separate transactions.

The ‘Wayfair’ Decision and Unanswered Questions

In a 5-4 decision, the court overruled Quill and held that a seller need not have a physical presence for a state to impose sales/use tax responsibilities. In so doing, the court indicated three factors in favor of upholding the South Dakota economic nexus statute: (1) the law provided a sales threshold protecting small sellers; (2) the law was not retroactive; and (3) South Dakota was a member of the SSUTA, which would serve to reduce the compliance burden on multistate sellers by having uniform reporting requirements.

Importantly, the court did not state whether the absence of any of the three factors would cause the court to conclude that another state’s economic nexus statute was unconstitutional. For example, the court did not address whether the $100,000/200 transaction thresholds were minimums or whether a lower threshold would be permissible. Likewise, the court did not address whether a non-SSUTA state could constitutionally assert nexus without physical presence. The court did not address the potential for retroactive application of economic nexus.

Additionally, the court did not address the validity of any of the other structures used by states to attempt to tax Internet commerce (i.e., affiliate nexus, marketplace nexus, or notice reporting.)

Finally, the court noted that its decision was based upon the interstate commerce clause of the Constitution, and as such, Congress had within its power the ability to modify or completely rewrite the rules for the taxation of interstate commerce.

States Rush to Enact ‘Wayfair’ Statutes

In the year since Wayfair, more than 40 states have enacted economic nexus statutes similar, but not necessarily, identical to, the South Dakota statute. While many of the states have copied the $100,000/200 transaction threshold, others have created larger thresholds and have eliminated the alternative minimum number of transactions threshold. Many of the states have set forth enforcement dates beginning shortly after the Wayfair decision, most typically requiring out-of-state sellers to register to collect sales taxes by late 2018 or early 2019. Obviously, since there are less than 25 SSUTA states and more than 40 enacting Wayfair legislation, many of the states having done so are not SSUTA compliant.

While the states rushed to enact Wayfair statutes, at least four bills were proposed in Congress to set forth national rules for the taxation of interstate commerce. None of the bills generated significant support, and there is currently little reason to believe that any will gain traction in the near future.

As a result, it appears most large Internet retailers and many smaller retailers have decided to register and collect sales taxes from their customers consistent with the new Wayfair statutes, even in situations in which the assertion of nexus may not be consistent with Wayfair. The primary motivation for doing so is that there is little detriment to doing so on a prospective basis. The economic incidence of the tax is borne by the customers with the retailer acting merely as a conduit between the state and the customer. Furthermore, if all retailers are required to collect sales or use tax, there is no competitive advantage for Internet retailers as opposed to brick and mortar retailers.

Potential Open Issues

The reasons most retailers have chosen to comply with potentially overreaching state Wayfair statutes contain the seeds of potential legal issues. First, while the requirement subjecting Internet sales to sales tax has leveled the competitive field between domestic Internet retailers and brick and mortar retailers, the field is not level for foreign based Internet retailers for at least two reasons.

In the first place, while the Wayfair court determined that the South Dakota statute satisfied the interstate commerce clause, it did not address the additional requirements of a state tax on foreign commerce as set forth in Japan Line Ltd. v. County of Los Angeles. Specifically, the state tax must not create a risk of double taxation and may not prevent the Federal Government from speaking with one voice in regulating commercial relations with foreign governments. Even though there does not appear to be any textual support for the position, the Utah Supreme Court recently held that the Foreign Commerce Clause applies only to corporations, but not to individuals.

Even if a state believed that its Wayfair statute were applicable to foreign retailers, it would face a practical barrier of enforcing its decision. U.S. courts will not enforce the tax laws of another country and foreign courts will likewise not do so. Consequently, so long as a foreign retailer does not have property in the U.S. that could be attached to pay sales taxes, a state would have no effective means of enforcing its positon that its Wayfair statute applied to international commerce.

As a result, foreign retailers could retain the competitive advantage that domestic Internet retailers have lost as a result of Wayfair. Because the overall share of foreign commerce is relatively small compared to domestic Internet commerce, it is unlikely that a challenge would arise on this basis. To the extent that foreign commerce flourished at the expense of domestic commerce as a result of tax competition, Congressional action on the issue may occur.

The more immediate potential open issue is the possibility of a state attempting to apply Wayfair retroactively. Because a successful, retroactive application of Wayfair would come out of the pocket of the retailer rather than the customer, retailers would almost certainly mobilize against a retroactive challenge. Perhaps as a consequence, the states have not aggressively sought to apply Wayfair retroactively. Nonetheless, few states have affirmatively disclaimed the power to do so. If a state becomes desperate to fill a budget hole and asserts retroactive sales tax liabilities, a substantial legal battle will likely ensue.


A general truce between Internet retailers and state taxing authorities endures one year after Wayfair. Most retailers have agreed to register and collect sales tax from their customers even where state Wayfair statutes may overreach past the boundaries permitted by the court in Wayfair. States have not attempted to apply economic nexus on a retroactive basis. To the extent that foreign commerce does not substantially impede domestic commerce based on tax competition and the states do not fall to the temptation of assessing sales tax retroactively based upon economic nexus, the truce should continue to endure. If either condition changes, there is a strong likelihood of additional litigation on the scope of states to impose tax based upon economic nexus.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Derek Rose is counsel in Brayn Cave Leighton Paisner LLP’s St. Louis office. His practice focuses primarily on federal and state tax controversy matters. John Barrie is a partner in Bryan Cave’s New York and Washington offices. His practice focuses solely in the areas of federal and state tax controversy and transactional matters.