The 2018 Supreme Court ruling in South Dakota v. Wayfair, Inc. marked a pivotal shift in how sales tax is handled for online commerce across the United States. Before this case, the precedent set by Quill Corp. v. North Dakota (1992) mandated that states could only require businesses with a physical presence — such as a store, warehouse, or office — to collect sales tax. This “physical presence” rule exempted many online sellers from collecting sales tax, creating disparities between brick-and-mortar businesses and e-commerce.

With the rapid growth of online shopping and e-commerce platforms, this outdated physical presence standard failed to reflect the realities of the digital marketplace. Local retailers and states argued this created unfair competitive advantages and deprived states of billions in potential sales tax revenue needed to fund public services.

South Dakota challenged the existing framework by passing a law in 2016 that required sellers with more than $100,000 in sales or 200 transactions within the state to collect sales tax, regardless of physical presence. Major online retailers, including Wayfair, disputed this, leading to the Supreme Court hearing the case.

In a narrow 5-4 decision, the Court ruled in favor of South Dakota, asserting that the physical presence rule was “anachronistic” in the modern economy. Instead, the Court embraced the concept of economic nexus, enabling states to require collection based on substantial economic activity within their borders. This means if a business exceeds specific sales volume or transaction thresholds in a state, it must register, collect, and remit sales tax there, even without a physical location.

The implementation of economic nexus has reshaped the tax landscape for businesses and consumers. Online retailers, regardless of size, must monitor their sales and transactions in each state and comply with varying state-specific rules. This has leveled the playing field for brick-and-mortar sellers and increased state tax revenues essential for public infrastructure and services.

To manage these complexities, many businesses rely on advanced sales tax automation software to track nexus, calculate appropriate taxes, and file returns. Despite this, understanding different nexus types — including physical nexus, affiliate nexus, click-through nexus, and marketplace facilitator laws — remains crucial for compliance.

For more detailed explanations of economic nexus and other forms of nexus, you can refer to our Economic Nexus and Physical Presence Nexus articles. Additionally, the related Wayfair Decision article gives further context on this transformative ruling.

Understanding the lasting impact of Wayfair v. South Dakota is essential for anyone involved in online sales or purchasing across state lines, as it governs the rules around sales tax collection in the digital age.

Frequently Asked Questions (FAQs)

Q: What is the main impact of the Wayfair decision?
A: It allows states to require online sellers to collect sales tax based on economic activity (sales or transaction volume), not solely physical presence.

Q: Who must comply with the Wayfair ruling?
A: Any business exceeding a state’s economic nexus thresholds must register and collect sales tax, regardless of business size or location.

Q: How do businesses know when they must collect sales tax?
A: They track sales and transactions per state. Each state sets thresholds, generally between $100,000 in sales or 200 transactions annually.

Q: Can ignoring sales tax collection lead to penalties?
A: Yes. States can audit businesses and impose fines, interest, and back taxes for noncompliance.

Q: Are all online purchases now taxed?
A: Not universally. Taxation depends on whether the seller meets the economic nexus criteria for the buyer’s state.

Sources

For official state tax details and compliance guidance, visit the IRS State and Local Tax page and respective state Department of Revenue websites.