The United States Supreme Court issued an opinion on June 21, 2018, that overturned two seminal cases in the area of state tax nexus—Quill Corp. v. North Dakota and National Bellas Hess, Inc. v. Department of Rev. of Ill. These two cases provided the basic tax nexus principle that a state could not require a retailer that did not have a physical presence in the state to collect the state’s sales taxes, even as applied to sales made to customers located in the state. In the case, the Court was considering the constitutionality of a new South Dakota statute that required non-present retailers to collect and remit South Dakota sales taxes if, on an annual basis, they either (i) delivered more than $100,000 of good or services into the state or (ii) engaged in 200 or more separate transactions for delivery of good or services into the state. The Court held that the statute was not unconstitutional because of a violation of the Quill and Bellas Hess physical presence requirement.
With Quill and Bellas Hess being overturned, the new standard for state tax nexus is provided by the U.S. Supreme Court’s decision in Complete Auto Transit, Inc. v. Brady. The holding in this case requires that an activity must have a “substantial nexus” with a state before it can be taxed and that a substantial nexus is established when a taxpayer “avails itself of the substantial privilege of carrying on business” in the state. So with this new holding the Court has replaced a bright-line physical presence test with a less clear “substantial presence” test. The Court did not rule on whether the new South Dakota statute was constitutional under the substantial presence test; this issue is likely to be addressed on remand.
Now that it appears that each state will be able to establish its own sales tax nexus standard, it will be important to see how the Texas Legislature responds. It should be noted that the dissenters in the new decision urged the United States Congress to step in and adopt standard that would apply nationwide, so this is another possible future development to follow.
The new U.S. Supreme Court decision is South Dakota v. Wayfair, Inc., No. 17-494.