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May 14, 2021
State Sales and Use Tax Nexus After South Dakota v. Wayfair
In its 2018 decision in South Dakota v. Wayfair, Inc., the
Supreme Court upheld a South Dakota law requiring out-of-
state sellers, orremote sellers, to collectandremit sales
taxes on goods and services delivered into SouthDakota.
For decades prior to Wayfair, the Court had construed the
Commerce Clause's substantialnexus requirement only to
permit state sales and use taxcollection duties on sellers
with a physicalpresence in the taxing state. As a result,
states could not impose sales and use taxcollection duties
on remote sellers that competed with in-state sellers. In
Wayfair, the Court overturned its physical presencerule on
the ground that the rule produced market distortions and
treated economically identical actors differently for
arbitrary reasons.
Nearly every state has now enacted laws modeled after the
South Dakota act upheldin Wayfair in order to facilitate
sales and usetaxcollection, stop the erosion of the sales tax
base, prevent revenue losses, and increase funding for state
and local services. However, it remains possible that courts
might rule that laws that do notresemble the South Dakota
law violate Commerce Clause principles. In Wayfair, the
Supreme Court only addressed the Commerce Clause's
substantialnexus requirement and concluded that several
features of the South Dakota taxsystemappear[ed]
designed toprevent discrimination against orundue
burdens upon interstate commerce. The Court stated that it
did not consider whether other Commerce Clause principles
might have compelled it to invalidate the South Dakotalaw.
This In Focus covers sales anduse taxes, theCommerce
Clause, and the Commerce Clause's substantialnexus
requirement for state s ales and use taxes before and after
Wayfair.
Sales and Use Taxes
Most states impose a sales taxon the retailsale of goods in
their states, andmany states impose a s ales taxon the retail
sale of specified services. In general, sellers collect sales
taxes fromconsumers at thetime ofpurchase andremit the
amount collected to the taxing state. When sellers do not
collect and remit sales taxes, consumers in the taxing state
are usually responsible forpaying a use taxat the same rate.
Use taxes are taxes on goods or services for the use,
storage, or consumption of goods or services in the taxing
state. As the Supreme Court observed in Wayfair, consunur
compliance with state use taxlaws is notoriously low,
and the shift fromin-person sales to online sales has led to
reductions in state revenues.
Commerce Clause
The U.S. Constitution's Commerce Clause is an affirmative
grant of authority to Congress to regulate interstate
commerce. The Supreme Court has interpreted the
Commerce Clause to include an implicit restriction, the
Dormant Commerce Clause, which limits state regulation
of interstate commerce even absentcongressional action.
Thus, states may require participants in interstate commeirce
to pay their fair share of state taxes so long as these taxes
do not produce an effect forbidden by the Commerce
Clause.
As explained in Wayfair, two generalprinciples guide
courts adjudicating Commerce Clause challenges to state
regulations of interstate commerce andmarkthe
boundaries ofthose regulations: (1) state regulations may
not discriminate against interstate commerce; and, (2)
[s]tates may not impose undueburdens on interstate
commerce. In Wayfair, the Court reaffirmed:
State laws that discriminate against inteistate
commerce face a virtually per se rule of
invalidity. State laws that regulat[e] even-
handedly to effectuate a legitimate local public
interest ... will be upheld unless the buiden
imposed on such commerce is clearly excessive in
relation to the putative localbenefits.
Congress has generally left it to the courts to determine
whethera state action has discriminated againstorunduly
burdened interstate commerce.
The Supreme Court set out the framework for determining
whether a state taxlaw violates the Commerce Clause in
Complete Auto Transit, Inc. v. Brady. In Complete Auto, the
Court statedit would sustain a state taxlaw against a
Commerce Clause challenge
when the tax is applied to an activity with a
substantial nexus with the taxing State, is fairly
apportioned, does not discriminate againstinteistate
commerce, and is fairly related to the services
provided by the State.
The substantial nexus prong of this test is often the
center of cases in which states have imposed sales and
use taxcollection duties on out-of-state sellers.
Sales and Use Tax Nexus Before South
Dakota v. Wayfair
The Supreme Court has frequently stated that the
Commerce Clause's substantialnexus requirement is
closely related to the Fourteenth Amendment's Due
Process Clausenexus requirement that there must be some
definite link, some minimum connection, between a state
and the person, property or transaction it seeks to subject
to a tax or a tax obligation. Until the Supreme Court's 1992
decision in Quill Corp. v. North Dakota, courts generally
regarded state laws imposing sales anduse taxobligations
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