On June 21, 2018, the Supreme Court ruled 5-4 in favor of South Dakota in South Dakota v. Wayfair, Inc., which upholds a law that states that even if a company does not have a physical presence in the state, the company is still required to collect and remit sales tax from their customers.

In the last few years, states have aggressively attempted to force companies to collect sales tax from their customers in new and unique ways, but ultimately the states were all hampered by one overarching theme – if the company did not have some sort of physical presence in the state, any new law would not apply to them and it would be unconstitutional.

This all stems back to a prior Supreme Court case from 1992. The Supreme Court ruled in Quill Corp. v. North Dakota that a company that did not have a physical presence in a state could not be forced to collect and remit sales tax. But just as the method of buying goods has changed in the last 26 years (mail order sales to internet sales), so has the Supreme Court’s opinion on what is constitutional.

Physical presence, historically, has been defined as having some sort of human feet on the ground or possibly even just storing inventory in the state. States started to push the definition of physical presence as more sales started occurring over the internet and their collection of sales tax from their taxpayers started to decrease. South Dakota alone estimates it was losing up to $58 million in sales taxes every year due to the changing economy. The current Wayfair case came about because South Dakota intentionally made a law that would ultimately need to be challenged in the highest courts in an attempt to recoup some of the lost tax revenue.

The standard that South Dakota decided to promote was that of economic presence instead of the old physical presence. If a company does ‘enough’ business activity in a state, the company would be required to collect and remit sales tax.

‘Enough’ business activity is open to interpretation, and each state can and will define what this means. In South Dakota, this is now defined as $100,000 in sales or over 200 transactions with residents of the state. South Dakota may have been one of the first states to define this economic presence for sales tax collection, but many other states have already created similar laws with similar thresholds.

If your company does or is thinking about doing business with residents across state lines and the questions “What do I do now?” or “How do I prepare for this?” are running through your head, this is a good thing. You will be on top of the changes that will sweep through the retail business community over the next few years. Our tax experts at Aldrich can help you determine if these sweeping changes will directly affect your business and help you prepare for the changes ahead. Please, don’t hesitate to contact us with your questions.