The U.S. Supreme Court's decision in South Dakota v. Wayfair, Inc. (585 U.S. ______ (2018)) in June 2018 overturned the established physical presence test that effectively prevented states from collecting sales tax on retail purchases made through the internet unless the seller had a physical presence within their borders. In the 5-4 majority decision, the Court stated that the physical presence requirement was an “unsound and incorrect” interpretation of the U.S. Constitution’s Commerce Clause. The decision vacated the previous precedent—set in National Bellas Hess v. Department of Revenue of Illinois, 386 U.S. 753 (1967), and affirmed in Quill Corp. v. North Dakota, 504 U.S. 298 (1992)—and remanded Wayfair to the South Dakota Supreme Court.

While the Wayfair ruling gives South Dakota and other states the ability to proceed with legislation for collecting sales tax based on alternative nexus definitions, it isn’t a panacea. The ruling does nothing to change states’ requirements for reporting sales tax information. This means companies still must navigate a variety of state regulations for information reporting and sales tax collection.


Some states have attempted to simplify state and local tax codes regarding the administration of sales and use tax. One effort is the Streamlined Sales Tax Project, which began in 2000 and was superseded in 2002 by the Streamlined Sales and Use Tax Agreement (SSUTA). The SSUTA has four primary objectives for simplification:

  1. State-level administration of sales tax,
  2. Uniformity in the state and local tax bases,
  3. Simplification of tax rates, and
  4. Uniform sourcing rules for taxable sales.

Twenty-four states support the SSUTA and are members of the Streamlined Sales Tax Governing Board, Inc.

The rationale behind making simplification a priority can be tied to both National Bellas Hess and Quill. National Bellas Hess closed by stating that the extreme variety in tax rates, deductions, and record keeping made it too complex for a business to abide by out-of-state sales tax. As a result, out-of-state retailers were “shielded from the obligation to pay sales tax.” Quill’s dissenting opinions argue that the rulings made in the 1960s weren’t applicable in the 1990s given the available technology and tracking systems. It suggested that technology would lessen the burden of compliance for sales tax collection and remittance.


While Wayfair was still making its way through the court system, legislators tried to resolve the issue through new laws. The Marketplace Fairness Act (MFA) of 2017 (S. 976) was introduced in the Senate on April 27, 2017, with 27 cosponsors. The Senate Committee on Banking, Housing, and Urban Affairs held hearings on it in May 2017. The House version of the bill, the Remote Transactions Parity Act (RTPA) of 2017 (H.R. 2193), which has 50 cosponsors, was also introduced on the same day. It was referred to the House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law on May 5, 2017.

The essence of both bills is that SSUTA members are authorized to collect and remit sales and use tax for remote sales, which are defined as sales of goods and services into a state where the seller isn’t legally required to pay, collect, or remit sales or use tax. The MFA and RTPA are far-reaching and define a “state” as the U.S. states, the District of Columbia, or any U.S. territory or possession.

Each bill offers exceptions for small sellers. The MFA has a simple definition for a small seller (those with less than $1 million in annual gross receipts), whereas the RTPA uses a tiered approach (see Sec. 2(c)(1) of the bill). In both bills, small sellers are exempt from tax collection and remittance from out-of-state buyers.

A notable nuance is that not all remote sellers are subject to tax collection and remittance by the MFA. Rather, only those that are SSUTA members must comply. In contrast, the RTPA requires non-SSUTA members to adopt and implement minimum simplification requirements for the administration and collection of sales and use tax.


In the Wayfair decision, the five majority justices positioned themselves as remedying the purported error of the Quill opinion. The majority opinion suggests that Quill’s physical presence requirement created marketplace distortions that favored remote sellers and created a tax shelter for businesses that limit their physical presence, which contributes to state revenue losses.

The Court offered an example of an in-state seller with a few inventory items in a warehouse (i.e., a physical presence) compared to an online retailer with pervasive sales (i.e., no physical presence). Its concern is that the physical presence test treats “economically identical actors” differently. The Court emphasized that physical presence was unnecessary. Rather, South Dakota’s economic nexus definition supports “extensive virtual presence” as being sufficient to create the substantial nexus required to justify imposition of a sales tax—the first prong in the four-prong test in Complete Auto Transit, Inc. v. Brady (430 U.S. 274 (1977)).

In contrast, the four dissenting justices expressed concerns about reverse market distortion—that the marketplace could be affected by abandoning the physical presence rules and that the Wayfair decision will lead to further complexity in the state sales tax laws. They held that interstate commerce (and the Commerce Clause) should be regulated by Congress because it has the ability to consider the competing interests at stake.

While the Court has issued a decision in Wayfair, the debate over simplifying the collection of sales and use tax is far from resolved. As it continues, businesses need to stay abreast of the rules and regulations required for the states in which they operate.

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