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US Supreme Court judgment eliminates “physical presence” nexus for sales and use tax

On 21 June 2018, the United States (US) Supreme Court (the Court) issued its much anticipated ruling in the case South Dakota v. Wayfair.1 As a result of the Court’s decision, US states may now begin to require all remote sellers to register, and collect and remit sales and use taxes on transactions with in-state customers regardless of the seller’s physical presence (provided that they do so in a manner that does not otherwise discriminate against or impose undue burdens on interstate commerce).

This is a significant judgment for US state taxes as it affects all businesses that have sales to US customers, including foreign businesses with no physical presence in the US. Affected businesses are likely to face increased sales and use tax compliance burdens regardless of their industry, filing history and current nexus footprint. This ruling and any subsequent actions taken by the states, are also likely to be influential on the approaches taken by governments around the world to taxing the digital economy.


In prior sales and use tax cases (notably, National Bellas Hess and Quill), the Court had held that, at least with respect to sales tax, a seller that lacked any direct or attributed physical presence in a state could not be considered to have a substantial nexus with that state. However, in a recent decision,2 Justice Kennedy noted that the “physical presence” standard constituted a “serious, continuing injustice faced by” the states. In Wayfair, Justice Kennedy explained that the doctrine had become “further removed from economic reality,” resulting in significant state revenue losses.

In the Wayfair case, the Court chose to focus primarily on the practical economic effect and the continued viability of the physical presence standard given the Internet’s “prevalence and power,” which has “changed the dynamics of the national economy.” The Court also dismissed concerns that compliance costs would harm the market, noting that, eventually, software would be available at a reasonable cost to lessen the burden on small sellers. To this end, the Court noted that the protections in South Dakota’s law – including sales threshold limitations, limits on retroactivity, and Streamlined Sales Tax (SST) membership – were sufficient to limit the burdens on interstate commerce. Nevertheless, the Court did not opine directly on the constitutionality of the law, choosing instead to vacate and remand the case back to South Dakota.


It is expected that individual states may shortly make announcements on what they intend to do in light of this significant ruling that is likely to have far reaching implications.

All businesses that make remote sales to US-based customers should immediately consider the likely impact of this decision on their operations, including assessing past liabilities, future obligations, the impact on their systems and the cost of compliance.

Companies that self-assess use tax on purchases or claim exemptions, will need to closely evaluate how increased collection by vendors will affect tax payments, while marketplace providers and small sellers will need to determine who will be considered the “seller of record” responsible for tax collection and remission under various state interpretations. Remote sellers that have made sales into US states in the past and not collected sales tax may also want to consider approaching the states under their voluntary disclosure or amnesty programs.


1. South Dakota v. Wayfair, Inc., Dkt. No. 17-494 (U.S. S. Ct. 21 June 2018).

2. Direct Marketing Assn. v. Brohl, 135 S.Ct. 1124 (2015).

EYG no. 010038-18Gbl

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