On June 21, 2018, the U.S. Supreme Court issued its ruling in South Dakota v. Wayfair, Inc., holding that physical presence in a state is not required for out-of-state retailers to be obligated to collect and remit sales tax on sales to customers in that state. The Court remanded the case to the South Dakota Supreme Court to determine whether South Dakota’s economic nexus provision otherwise violates Commerce Clause protections.
While physical presence has been the constitutional standard for sales tax nexus purposes under the now overturned Quill decision, almost all states have traditionally distinguished that ruling for corporate income tax purposes. However, practitioners have long suggested that Quill’s physical presence rule should apply to corporate income tax nexus and that factor-presence based nexus standards potentially violate this rule.
With Quill gone, Wayfair may encourage more states to enact factor-presence based nexus standards for corporate income tax purposes. Alabama, California, Colorado, Connecticut, Michigan, New York, and Tennessee are all states that currently have such a test under which out-of-state corporations are deemed to have nexus for corporate income tax purposes where they have property, payroll, or sales in those states that exceed statutory thresholds.
In contrast, certain states like Delaware and Pennsylvania currently require by statute entities to have physical presence in the state to be subject to the state’s corporate income tax. Though not necessarily a direct result of the Wayfair decision, these states may consider the policy implications of removing their physical presence requirement, which would certainly help broaden their tax bases.
It remains to be seen whether a subsequent decision by the U.S. Supreme Court will provide more concrete guidance on what “substantial nexus” under Complete Auto effectively means. “Substantial nexus” should be just that, substantial, and Justice Kennedy indicated in dicta that there is a corresponding “de minimis” threshold under the standard. In a limited sense, the Wayfair decision solidifies the Constitutional footing of factor-presence based nexus and more states may choose to leverage the standard for corporate income tax purposes.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Following Wayfair, how might states change their corporate income tax nexus standards?
Review the biggest developments in state tax for the first half of 2018 with Bloomberg Tax’s State Legislative Sessions Review Webinar on Wed., July 25, 2018. To register, click here.
Get a free trial to Bloomberg Tax: State, a comprehensive research service that provides deep analysis and time-saving practice tools to help practitioners make well-informed decisions.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)