Implications of Wayfair Beyond Sales Tax

by Chris Hopkins

The Wayfair decision can serve as a catalyst for a company to re-examine its state tax nexus decisions, taking into consideration relevant case law, statutes, and regulations.


In late June 2018, the U.S. Supreme Court reversed a long-standing position and ruled that a physical presence was not required in order for a state to impose a sales and use tax collection obligation on an out-of-state business. South Dakota v. Wayfair, Inc. overturned the court’s 1992 Quill Corp. v. North Dakota decision, which had upheld the physical presence nexus standard established by the court in 1967 in National Bellas Hess v. Department of Revenue of Illinois. The court in Wayfair concluded that the physical presence rule it had previously endorsed was “unsound” and an “incorrect interpretation of the Commerce Clause.”

In 1993, even before the Quill dust had settled, South Carolina’s highest court concluded that Quill applied only to sales and use tax and the concept of economic nexus could be applied to the state’s income tax. In Geoffrey, Inc. v. South Carolina, the South Carolina Supreme Court ruled that an out-of-state intellectual property licensing company was subject to the state’s income tax because it was regularly exploiting the markets of the state, notwithstanding the lack of a physical presence. Following the South Carolina court’s lead, the supreme courts of several other states – including Iowa, Massachusetts, New Jersey, and West Virginia – similarly held that economic nexus could be applied to state taxes other than sales and use tax. At last count, more than 40 states had adopted either by statute or through case law an economic nexus standard for income or franchise tax.

While Wayfair, Quill, and National Bellas Hess addressed whether an out-of-state retailer had an obligation to collect and remit sales and use tax, the Wayfair decision’s implications extend to other state-imposed taxes.

Since Quill and prior to Wayfair, the Supreme Court had declined to accept taxpayer petitions to review state income tax nexus decisions issued by state courts. This led some taxpayers and tax practitioners to question the constitutionality of state assertions of economic nexus. With the Wayfair decision, doubt concerning the validity of an economic nexus standard where a physical presence is lacking has – for the most part – been removed.

Wayfair also reinforced the “substantial nexus” requirement under the commerce clause articulated by the Supreme Court in its 1977 Complete Auto Transit, Inc. v. Brady decision. For a state to impose a tax, the nexus thresholds under both the due process and commerce clauses must be met. The “minimum connection” requirement under the due process clause is a fairly low bar. The commerce clause’s substantial nexus standard, on the other hand, generally requires some affirmative action on the part of the taxpayer, such as purposefully directing business activities into the state.

Additionally, implicit in the Wayfair decision is an acceptance by the court of a statutory bright-line activity threshold for the imposition of state tax under the commerce clause. In the case of South Dakota, it was more than $100,000 of South Dakota sales or 200 or more transactions with South Dakota customers in a tax year. While the court did not specifically endorse South Dakota’s rubric, limited activity in a state with no bright-line standard or a nexus threshold that is substantially lower than South Dakota’s may not be sufficient for meeting the substantial nexus requirement of the commerce clause. In fact, it’s not inconceivable for a business to have a physical presence in a state and not be subject to that state’s income tax (or sales and use tax) regime.

Finally, if, in light of Wayfair, a business registers only to collect and remit sales and use tax, it likely can expect nexus inquiries from states concerning subjectivity to other types of state tax. Although federal law (P.L. 86-272) prohibits states from imposing an income tax on a business in certain circumstances, this restriction applies only to income tax and only if a business’s in-state activities are limited to solicitation of sales of tangible personal property.

While Wayfair principally addressed nexus in the context of sales and use tax, it also effectively endorsed assertions by states that physical presence was not a prerequisite for the imposition of income tax and other entity-level taxes. As such, the Wayfair decision can serve as a catalyst for a company to re-examine its state tax nexus decisions, taking into consideration relevant case law (including Wayfair), statutes, and regulations.

Chris Hopkins is a Partner at Crowe LLP.