Why You Keep Hearing About Wayfair and Why This is Just the Beginning
You may know of Wayfair as an online retailer of home décor and the like; but the company is also a party to a recent Supreme Court case related to the payment of state sales tax on items purchased online.

The Gist
While online purchases were not previously exempt from tax, online retailers generally collected state sales tax if the purchaser was located in a state where the retailer had employees or property. That is known as the “physical presence” rule; the idea was that it would be difficult for a seller to comply with the sales tax laws of each state so retailers only collected sales tax in states where they had that physical presence (also know as a nexus). When the retailer did not collect sales tax, the buyer was supposed to pay use tax to the state but, as you can imagine, most buyers were not actually paying the use tax.
Now that online retail has rapidly grown into a massive industry and state budgets seem tighter each year, states have been looking for ways to increase revenue and collection of sales tax looks like a lucrative revenue source. States will be able to create law that requires online retailers to collect and remit sales tax to the states for items sold nationally. Up until now, we all thought, “I think I pay sales tax but only part of the time- what is that about?” You will begin seeing sales tax added to your online purchases more consistently as states begin passing legislation to require collection by retailers.
Why did SCOTUS rule in this way?
The Supreme Court dealt with a few primary issues in this case. Generally it is unconstitutional for states to pass law that unduly burdens interstate commerce. States can’t pass regulation that favors commerce between parties within the state over engaging in transactions with parties from out of state. The Court does describe prior holdings that have brought us here, but if you wanted to read all that you would read the SCOTUS opinion so I will stick to the high points (if that is your cup of tea, here is a link: https://www.supremecourt.gov/opinions/17pdf/17-494_j4el.pdf. Enjoy!).
Lets identify a few realities of the market as the Court does in the Opinion. Physical boundaries and state lines do not generally have the same economic impact since so much of commerce happens online. Most other functions of marketing, sales, and distribution continue on without regard to state lines so perhaps this physical presence standard really should not apply anymore. Technology has made it much easier to collect sales tax; most large online retailers have already developed the technology to collect and remit sales tax.
The Court held that the physical presence test essentially allows state residents that make purchases online from out of state sellers to evade taxes creating an unfair burden on the citizens that are purchasing from sellers with a physical presence and paying state taxes. The Court also cited its own obligation to uphold law that generates public confidence in the tax system and avoid creating inequalities between sellers in the market depending on whether they are physically located in the state. The Court described the physical presence test as a barrier to states’ collection of lawful revenue. The Court discusses “virtual connections” as being more important that physical connections in our world of online retail and services that has in fact grown and changed economic markets and commerce.
To understand what the Court is saying, lets consider the SCOTUS example of a small online retailer with a small storage facility in the state that has to create systems to pay sales tax and charge it to their customers. A large online retailer that does not have that storage facility in the state, selling the same item to the same consumer does not have to collect that tax and their consumer does not have to pay the sales tax that the consumer has to pay when making the same purchase from the small retailer. This illustrates how the physical presence rule could create inequality in the market. Also note that the large online retailer is probably more able to handle the cost of devising and implementing a system to collect the tax.
It seems like tax laws always have exceptions; what’s the catch?
The South Dakota law implemented an “economic nexus” test. It is important to note that this new standard will not necessarily apply to all online sellers. In S.D. it applies to those who sell over $100,000 of goods or services in a state, or have more than 200 transactions a year in that state. Very small retailers may not reach this threshold and may not be affected, but there will be many that have to adapt. It is likely that other states laws will have similar exceptions for smaller sellers that might be more significantly burdened by the law and have less activity in the state. Since the law must be written to impact retailers that have a substantial nexus with the state, there should be qualifiers like this but the opinion does not provide guidance on what would be a substantial nexus creating a gray area that will surely be the basis of further lawmaking and probably litigation.
So what does all this mean for you?
The general opinion is that this ruling is not good for consumers, small online retailers, and a hit for e-commerce generally. Some may argue that increased revenue to the states will manifest in good outcomes for residents of that state; it is a lot of money for most states (all but 5 states collect sales tax). If you are a large retailer, like Amazon for example, you have probably already developed programs and mechanisms to collect and pay sales tax to the states and if not, you are large enough that you should be able to afford to. If you are one of those companies you also have seen and will continue to see fluctuation in your stock value as this area evolves. If you are a consumer who hasn’t been paying use tax (most everyone) or sales tax on many online items, you will be charged sales tax more frequently making some items more expensive for you. If you are a smaller business that does some online sales and meets the nexus test, this could be quite expensive, as you will have to come up with a system to pay sales tax in states where your buyers live. We will have to wait and see what the states decide to do but we can expect for this to have some impact on the e-commerce market. Consumers have demonstrated that they appreciate convenience so it seems this change is unlikely to drastically affect consumer behavior for most purchases and it will probably require more effort to find products from a retailer that meets the exception to charging sales tax. As always, there will certainly be unintended consequences and perhaps you will be reading about those events here in the years to come.

