"Physical presence rule" for out-of-state businesses to be required to remit sales taxes h



On June 21, 2018, the United States Supreme Court, in South Dakota v. Wayfair, Inc., held that the “physical presence rule,” a requirement to establish that an out-of-state business has a “substantial nexus” to a State prior to being required to remit sales taxes to that State, was “unsound and incorrect[,]” overruling National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967) and Quill Corp. v. North Dakota, 504 U.S. 298 (1992). South Dakota passed a sales tax which required out-of-state businesses, who on an annual basis either sold $100,000 of goods or services or had 200 separate transactions, to remit the sales tax to South Dakota. South Dakota’s sales tax was only forward-looking, and did not attempt to capture prior taxes owed. South Dakota also passed the sales tax by declaring an emergency, as their sales tax receipts plummeted by an estimated $48-$58 million annually. Wayfair, Inc., and a few other large online retailers, challenged the sales tax as a burden on interstate commerce in violation of the Commerce Clause of the United States Constitution, Art. 1, § 8. These entities alleged they did not have a “substantial nexus” to South Dakota, as they had no physical presence within the State, and thus the sales tax violated the Commerce Clause. See Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) (A State may tax exclusively interstate commerce, so long as certain requirements, including a “substantial nexus” to the taxing State, are met).

Prior Supreme Court precedent required an out-of-state business to have a physical presence to establish a “substantial nexus” to the taxing State. The majority opinion expressed that the physical presence rule was no longer workable in the 21st Century’s economy with large-scale online retail sales, and that prior precedent had in fact created a burden on interstate commerce by giving an advantage to online retailers who did not have a physical presence compared to brick-and-motor stores. As such, physical presence is no longer a requirement to prove a “substantial nexus” to the taxing State.


While this website is intended to be used as a resource, not an advertisement, the choice of a lawyer is an important decision and should not be based solely upon advertisements.  Information and documents provided herein are for reference or educational purposes only and are not intended to render legal advice ©2019