South Dakota v. Wayfair – six years later

The world no longer looks like this. Today, almost 16% of all retail spending takes place online and, in 2023 alone, $1.243 trillion in online purchases were made. As the nature of commerce has changed, sales tax rules have had to change along with it.

The biggest change was ushered in by a case called South Dakota v. Wayfair in 2018. This case altered a long-standing rule that said states could impose an obligation on businesses to collect sales tax only if the company had a physical presence in the state.

Under Wayfair, economic nexus is now sufficient to trigger sales tax obligations. But, what is economic nexus, what does this mean for your business, and how did Wayfair change the game? Read on to find out. 

Background on sales tax and nexus rules

Sales tax is a tax companies must charge on the sale of certain goods or services. Sales tax is usually expressed as a percentage of the purchase price, such as 6%. Companies are responsible for determining if an item is taxable, collecting the correct amount of tax, and then submitting a sales tax return and remitting the collected tax to the state. 

States can't just make every business serve as their tax collectors, though. The business must have sufficient connections with the state. It would not, for example, be reasonable for a Florida company that sold one item by mail to someone in California to be required to register to collect tax in the state, learn the state's rules, collect the tax, submit a tax return, and pay the tax due.

Nexus is the key factor in determining if a company has sales tax obligations within a particular state. If there is no nexus because the company doesn't have meaningful connections with the state, then the company typically has no obligation to the state's Department of Revenue to collect and pay sales taxes locally. 

Establishing nexus before Wayfair

South Dakota v. Wayfair is the most famous sales tax case today, but before Wayfair there were other cases that established the law of the land for decades. One of those was called Quill Corp. v. North Dakota and it was heard by the Supreme Court in 1992.

Quill was a mail-order business that sold office supplies and equipment. It had its headquarters in Delaware, as well as physical locations including offices and warehouses in Georgia. 

Quill had no physical connection to North Dakota, but because customers in North Dakota were purchasing supplies by mail from the company, the state wanted Quill to pay its use tax (that's a tax that's similar to sales tax but charged based on storing, using, and consuming items).

Since Quill's only involvement with North Dakota was mailing goods there, it argued that North Dakota had no power to make the company collect the tax. The Supreme Court evaluated whether this was the case or not, based on two key clauses within the U.S. Constitution:

• The Due Process Clause, which requires minimum connections between a state and an entity it's trying to tax
• The Commerce Clause, which allows Congress to regulate interstate commerce (commerce between the states). The court also recognizes a "negative" or "dormant" commerce clause too, which says states can't unduly burden interstate commerce.

In Quill, the Supreme Court found that while past judicial rulings stressed that the due process clause required a physical connection between the state and the entity asking it to remit taxes, there are circumstances when physical presence isn't required if the retailer purposefully directs economic activities of a certain magnitude to residents of the state. 

However, the court felt the Commerce Clause required the establishment of a bright-line rule that physical presence is mandatory to create certainty and to avoid unduly burdening interstate commerce.

In other words, the court in Quill said a physical presence was still necessary before a state could make a business collect sales and use tax. 

The South Dakota v. Wayfair case

While Quill's physical presence requirements remained the guiding rule for decades, the world of commerce changed rapidly with the widespread adoption of the Internet. As shopping online became increasingly popular, states were losing out on significant amounts of tax revenue because consumers began buying from online sellers instead of shopping locally.

In 2016, South Dakota tried to do something about this. The state passed a law requiring some online sellers to collect and pay sales tax on items shipped to residents even without a physical presence. However, sellers only had to do this if they had 200 or more separate transactions with South Dakota customers or delivered at least $100,000 of goods and services in state.

Unsurprisingly, the law was challenged and ended up in court. The case ultimately proceeded to the Supreme Court, and in South Dakota v. Wayfair,  the Supreme Court was asked to rule on whether South Dakota's law passed muster under the Constitution.

South Dakota argued to the Supreme Court that Quill's physical presence requirement caused unforeseen harm by:

• Depriving states of critical revenue
• Forcing local retailers to compete on a disadvantaged playing field
• Damaging interstate commerce

Despite upholding physical nexus requirements twice before, both in a 1967 case called National Bellas Hess v. Department of Revenue and in Quill, the court ruled differently this time, finding Quill to be "flawed on its own terms," because the physical nexus requirement was "a judicially created tax shelter for businesses that limit their physical presence in a State but sell their goods and services to the State’s consumers."

The court determined that 

• The physical presence rule is not a requirement to establish a substantial nexus with the state
• Quill created market distortions by allowing online, but not local, sellers to avoid charging sales tax. 
• Quill created an arbitrary and formal distinction that the modern interpretation of the Commerce Clause does not support.

With the physical presence requirement costing $58 million every year just in South Dakota,  the court found that the physical presence requirement "has limited States’ ability to seek long-term prosperity and has prevented market participants from competing on an even playing field.”

The court also found that South Dakota's law appeared to have been designed to prevent burdens on interstate commerce because it:

• Did not apply economic nexus retroactively 
• Provided a safe harbor for small sellers who had fewer than 200 transactions or did less than $100,000 in business.

South Dakota was also a member of the Streamlined Sales Tax Agreement (SST), so had already taken steps to reduce administrative and compliance costs.

For all of these reasons, the court overturned Quill and the physical presence requirement was gone for good. Instead, Wayfair ushered in a new era of economic nexus. Under these new rules, if a company has a sufficient amount of economic transactions in a state, this is sufficient to trigger the obligation to collect sales tax. 

Physical nexus still exists as well, so now there are two different ways that a business could become obligated to collect sales taxes in a specific location:

1. If the company has a physical presence and establishes a physical nexus
2. If the company does enough business to establish an economic nexus

Post-Wayfair reactions and controversies

Wayfair came as a surprise to many because of the court's repeated history of upholding physical nexus requirements. And not everyone agreed. In fact, the Supreme Court published a dissent, which stated that the majority's decision "breezily disregards the costs that its decision will impose on retailers.”

Because of the Wayfair decision, the dissent pointed out that businesses would now be subject to tax rules in potentially as many as 10,000 different tax jurisdictions -- each with their own complex laws.

Many lawmakers also pointed out that this was an issue that should have been decided by Congress, not by the courts.

Despite the controversy, however, states sprang into action.

Some had already put laws on the books in anticipation of Quill being overturned that could take effect immediately with the Wayfair decision. Others had long-standing dormant laws. In fact, New York's Tax Law Section 1101(b) (8)(iv) established an economic nexus rule nearly 30 years prior, and the state issued guidance shortly after Wayfair indicating that this law applied retroactively back to the state of the decision.

Others began drafting new legislation that would soon require every Internet business to know and comply with tax rules across the country.

Changes in the six years since Wayfair

Wayfair has been referred to as a "momentous case," and as the biggest sales tax ruling in history, and with good reason. It fundamentally changed the landscape and resulted in every state passing economic nexus laws that would make online sellers responsible for collecting sales tax if they had sufficient financial connections with the area. 

Adoption of economic nexus laws across states

Because the Supreme Court praised South Dakota for going out of its way not to burden interstate commerce, states across the U.S. took inspiration from this model. Specifically, most states set a specific threshold when sales tax obligations would kick in and, like South Dakota, many established these thresholds based on both:

• Number of transactions
• Transaction value 

The problem is that states did not adopt universal rules. The volume thresholds range from around $100,000 to $500,000 before tax obligations are triggered. And while some locations have a separate transaction-based threshold, such as triggering sales tax obligations after 200 transactions, others use the transaction volume rules alone. 

There are also different rules in different jurisdictions for the period in which the economic nexus standard replies. For example:

• In some states, it is the past calendar year. 
• In some states, it is the current calendar year.
• In some states, it is a rolling 12-month period

This has created an incredible amount of complexity -- and laws are still evolving. In fact, Alaska just changed its sales tax rules effective January 2025 to remove the 200 transaction threshold for economic nexus. Now, businesses become responsible for collecting sales tax only after they do at least $100,000 in sales in the state.

Marketplace facilitator laws

Wayfair gave states important new powers enabling them to charge sales tax in many more situations. However, there were still gaps in these rules. Specifically, one issue quickly began to arise: Amazon was charging sales tax on products the company sold directly but was not collecting sales tax on third-party transactions. 

With more than half of all transactions on Amazon facilitated through third-party sellers, states were missing out on a significant amount of revenue. As a result, many began to pass marketplace facilitator laws requiring sites like Amazon and Etsy to collect sales tax on transactions on their platform even if the items are ultimately sold by third parties. 

Today, marketplace facilitator laws exist throughout the U.S. While this can help ecommerce merchants in some ways if marketplaces collect and pay taxes on their behalf, things, unfortunately, are not that simple.

Marketplaces only handle sales tax on transactions through the platform, so sellers who sell elsewhere may still need an active sales tax permit. Plus, some states count transactions that occur on marketplaces when determining if a business has established economic nexus, but others don't. 

Impact on businesses

Wayfair and the resulting state laws that passed have created a world in which businesses must actively stay compliant:

• Monitor their transaction volume in all 50 states
• Understand the different rules for establishing economic nexus nationwide
• Potentially register to collect sales tax in multiple jurisdictions across the country
• Collect the correct amount of sales tax even as states have tens of thousands of different rules on what is taxable and what isn't. For example, in some states, digital goods are taxable, and SaaS is not.
• Keep track of exemptions and keep exemption certificates on file when entering into transactions with exempt buyers, including certain government and non-profit organizations 
• Comply with sales tax filing due dates, which vary by jurisdiction
• Keep track of different rules, such as what transactions count towards establishing nexus
• Remember whether each state requires them to file a return only if they owe taxes or in all situations once they are registered

This is a very substantial burden, just as the Wayfair dissent warned it would be. The good news is that automated tools like Numeral help businesses accomplish all these tasks and more. 

Numeral can track nexus, register your business for sales tax permits, collect and pay sales taxes on your behalf, submit your tax forms, and even respond to correspondence from Departments of Revenue. 

You must comply with sales tax rules thanks to Wayfair, but thanks to programs like Numeral, this can take you just five minutes per month instead of endless hours of wading through complex tax laws.