On June 21st, the United States Supreme Court issued its long-awaited decision in South Dakota v. Wayfair, overturning the requirement that an out-of-state seller have physical presence in order for a state to require the seller to collect and remit state and local sales tax. Under Wayfair, substantial nexus exists if the taxpayer “avails itself of the substantial privilege of carrying on a business in that jurisdiction.”

1. The Wayfair Decision
and Your Business
Presented by:
Jonathan Wellington
214.461.1430
jwellington@lgt-cpa.com

2. Agenda
• History
• The Decision
• The States’ Response
• Now what?
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3. HISTORY

4. Constitutional Basis for Multistate
Taxation
• Commerce Clause (Article I, Section 8, Clause 3):
• “The Congress shall have the Power… To regulate commerce with
foreign Nations, and among the several states…”
• Congress has power to regulate interstate commerce
• Therefore, limitations exist on states’ rights to impact interstate
commerce (Dormant Commerce Clause)
• Also Due Process Clause considerations:
• No state shall "deprive any person of life, liberty, or property, without
due process of law."
• Interpreted as an economic nexus standard, so lower threshold than
Commerce Clause concerns
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5. Early Cases
• National Bellas Hess (1967) – mail order company could not be
required to collect sales tax without physical presence in the
taxing state
• Complete Auto Transit (1977) – four-factor test for state to tax:
• Activity being taxed must have a “substantial nexus” within the taxing
state;
• The tax must be fairly apportioned;
• The tax cannot discriminate against interstate commerce; and
• The tax must be fairly related to the services provided by the taxing
state
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6. Quill Corp. v. North Dakota (1992)
• Quill – mail order business solicited in North Dakota using
catalogs, flyers, ads and phone calls
• North Dakota Supreme Court – ruled in favor of North Dakota
because changes in the economy (and C.A.T.) meant that
National Bellas Hess was no longer applicable
• U.S. Supreme Court – Reversed, holding that physical
presence related to “substantial nexus” factor of C.A.T. test
(must be more than slightest presence)
• Court also relied on stare decisis, but noted that if NBH had
been heard in 1992, result may have been different.
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7. Post-Quill
• Quill – physical presence standard remained the standard for
25+ years
• States tried many ways to circumvent Quill’s physical presence
requirement
• Limited to sales tax (i.e., economic nexus for income taxes)
• Very narrowly defined what is “slightest presence”
• Variety of other ways to assert physical presence:
• Affiliate/attributional nexus
• Click-through nexus
• Cookies equal physical presence
• Use tax reporting
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8. Use Tax Reporting Requirements
• At least 9 states have use tax reporting requirements
• AL, CO, CT, LA, OK, RI, SD, VT, WA
• Current Washington law – “remote sellers” with $10,000 of
Washington gross receipts in the current or prior year must choose
to collect sales tax or comply with “use tax reporting requirements”
• Conspicuous notice on web site that sales tax is due
• Notice to each customer at time of sale about sales tax
• Provide an annual report to each Washington customer of taxable
transactions
• Provide an annual report to Department of Revenue with relevant information
• Failure – Non-waivable $20,000 penalty for violating (1) and (2), can be over
$100,000 for failing (3), and $25 per customers for violating (4)
• Note – Wayfair is not about whether use tax reporting requirements
are constitutional
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9. Streamlined Sales Tax Agreement
• Streamlined Sales tax Project (SSTP) began in 2000 (became
SSTA in 2005)
• Goal: to simplify sales tax compliance by minimizing differences
between states
• Common definitions
• State-level administration of all sales taxes
• Uniform tax base (goods and services taxed in same way)
• Simplified tax rates
• Uniform sourcing rules (look to in-state vendor location or state rate for
out-of-state vendors)
• 23 members and 1 associate member of SSTA (smallest states)
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10. Direct Marketing Ass’n v. Brohl (2015)
• Decision was related to jurisdiction to hear case about
Colorado’s use tax reporting rules
• Justice Kennedy’s concurrence – basically, he wished the Court
focused on changes in technology and society when it decided
Quill and the argument against physical presence has only
grown stronger
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11. South Dakota v.
Wayfair, Inc.

12. Wayfair - Background
• Among several states, South Dakota heard Justice Kennedy
and passed a 2016 law requiring sales tax collection if more
than $100,000 in goods and services into the State or more
than 200 separate transactions in the State (no retroactive
application)
• Sued Wayfair for taxes, lost, and appealed up the chain to the
U.S. Supreme Court
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13. Wayfair - Holding
• https://www.supremecourt.gov/opinions/17pdf/17-494_j4el.pdf
• Physical presence test is inherently flawed because:
• C.A.T. test does not require physical presence (requires substantial
nexus)
• Quill created (and did not resolve) market distortions (“judicially created
tax shelter”)
• Arbitrary, formalistic test (Supreme Court has moved away from such
bright-line tests in the Commerce Clause area)
• Therefore, stare decisis insufficient in the face of the changes to
the national economy and no “legitimate reliance concerns… on
the practical opportunities for tax avoidance.”
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14. Wayfair – New Standard
• New test – whether the taxpayer “avails itself of the substantial
privilege of carrying on business in that jurisdiction.”
• Supreme Court held that South Dakota law was valid under this test
(could have overturned Quill without approval of law)
• Importantly, Court recognized certain aspects of South Dakota law
ensure that it does not discriminate against or impose undue
burdens on interstate commerce:
• No retroactive application
• Only applies where “considerable amount of business” in State ($100,000 or
200 transactions)
• South Dakota is a party to the SSTA
• Technology and the market should ease concerns over compliance burden
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15. The States’
Response

16. Texas Response
• https://comptroller.texas.gov/taxes/sales/remote-sellers.php
• Expected to use $500,000 threshold
• Earliest implementation for out-of-state sellers into Texas is late
2019
• May require legislative action in 2019 session
• Comptroller interested in proposing marketplace provider
legislation to complement their Wayfair response
• Would make marketplace provider liable for sales taxes
• Texas is not a member of SSTA and no plans to be
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17. Other States’ Response
• Many states have already implemented rules or laws along the
lines of South Dakota with varying start dates;
• Some already in effect; others are pending
• 5 states have no sales tax (NOMAD)
• About 10 states have stuck with physical presence
• About 25 follow South Dakota exactly
• About 10 with higher thresholds
• Lots of gray areas for potential litigation in the future
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18. Federal Response
• Nothing really new but revived discussion of existing ideas
• The Marketplace Fairness Act - basically Wayfair with SSUTA
requirement (Remote Transactions Parity Act is similar)
• The Online Sales Simplification Act (2015) - remit to origin state
• U.S. Supreme Court was hoping for Congressional action after
Quill (1992)
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19. Now What?

20. Wayfair – Open Questions
• What would impose undue burdens on interstate commerce?
• Court admits that compliance in 50 states can be a burden, especially for small
businesses (but not too worried)
• How important is SSTA membership?
• What level of activity is sufficient amount of business (less than $100,000
or 200 transactions)? What is a single transaction?
• While these issues may be litigated, will take years before audits and
subsequent protest process results in any decisions
• Retroactive? Currently, no states are trying to apply Wayfair retroactively
• What about income taxes? Likely that any state changing their law will
also change their law for income/franchise taxes as well
• Congressional action?
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21. What Should Taxpayers Do?
• Do NOT rely on previous guidance about where you should be
filing for sales and use tax purposes
• DO consider performing a nexus study to review historic and
post-Wayfair nexus footprint
• If you identify potential sales tax exposures, consider voluntary
disclosure agreements (VDAs) or amnesty programs
• DO reconsider the impact of sales taxes on the entire business
(i.e., can you be more flexible in locating employees? Were you
considering a warehouse in another state?)
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22. What Should Taxpayers Do?
• Review your prior calendar and 12-month periods to determine
where you have sales above the statutory threshold amounts
(LGT or other consultants can help)
• Consider your future expansion plans
• Another consideration in performing due diligence on target companies
and another factor to consider in their integration
• May need to register in new states for sales tax (and with
respective Secretaries of State)
• Secretary of State filings
• Requires registered agents (and fees) – be careful of risks in using
employees as registered agents
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23. What Should Taxpayers Do?
• DO collect resale/exemption certificates from customers in other states for
audit defense (maybe even before you cross any nexus-creating
thresholds)
• Even if no tax is due, and even if you choose not file zero returns, collect those
certificates in case of audit!
• Failure to file = no statute of limitations
• DO review the taxability of your products and services in other states
• Just because a service is not taxable in Texas, does not mean it is not taxable in other
states
• Some states tax almost everything (gross receipts tax)
• Some states offer partial exemptions or reduced rates for certain products
• DO review your invoicing approach.
• You may wish to bundle certain taxable items together and separately charge for
nontaxable items
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24. Other Taxpayer Considerations
• Remember – you may also now have income tax filing
requirements in additional states
• Some states (like Texas) have maintained a physical presence
standard for income taxes as well as sales tax, and those standards
may be eliminated
• Public Law 86-272 is still in effect and should mitigate consequences
• Monitor new developments as states change their rules and
those rules get challenged by taxpayers
• Consider using an outside vendor to assist in sales tax
compliance or other impact on your technology
• What are the best/cheapest ones? (Avalara, Vertex, etc.)
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25. Miscellaneous Topics
• Non-profits – no special rules but many states exempt their
sales
• Texas – NFP sales are taxable (with small exceptions); purchases are
exempt
• Software – nearly all states treat software as tangible personal
property, with some exceptions
• Custom software v. canned software
• Local taxes – still a lot of confusion but in theory should be easy
to administer (Louisiana – “does not conform in any measurable
way with the factors outlined in the Wayfair opinion as
significant in evaluating whether South Dakota’s law imposes
an undue burden on interstate commerce.”)
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26. The Wayfair Decision
and Your Business
Presented by:
Jonathan Wellington
214.461.1430
jwellington@lgt-cpa.com

27. Disclaimer:
The material and information contained in this webinar is current as of the date produced
and is for informational and entertainment purposes only. It should not be relied upon
without seeking professional advice specific to your personal facts and circumstances.
Any advice given is not intended by the participants or Lane Gorman Trubitt LLC, to be
used, by a client or any other person or entity for the purposes of avoiding penalties that
may be imposed on any taxpayer or promoting, marketing, or recommending to another
party any matters addressed herein.