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Physical presence may give way to economic presence as the test for whether state sales tax must be collected and paid by online buyers and sellers.

Tax strategies

Nonprofit Tax: Supreme Court to Decide Who Must Pay Online State Sales Tax

  • Karen Gries
  • 4/23/2018

Update: 6/22/18
On June 21, 2018, in the Wayfair case the Supreme Court overturned Quill Corp. v. North Dakota. This could potentially open the door for all states to collect sales tax even if a business does not have a physical presence in that state. Read our updated article to learn more.

A decades-old Supreme Court ruling is expected to have its day of reckoning this summer. The court’s pending decision in South Dakota v. Wayfair, Inc. could mean nonprofit organizations are required to collect and remit sales and use tax when selling across state lines. Depending on how the court rules, organizations including associations, colleges, and universities, may need to re-examine the tax laws in all of the states where they do business and implement internal practices to ensure compliance in this area.

Sellers could be required to comply with thousands of state and local taxing jurisdictions with varying definitions of nexus, taxable goods, and enumerated services.

Examples of sales that may trigger a sales and use tax requirement include:

  • Your organization sells merchandise online to buyers in other jurisdictions
  • Your organization sells items at meetings and conferences outside your own jurisdiction
  • You perform certain services for customers in jurisdictions in which such services are subject to sales tax

Under such circumstances, your organization may be required to collect sales tax based on the location of the buyer, and remit the tax to the buyer’s taxing jurisdiction (or jurisdictions).

Physical presence versus economic presence

Since 1992, organizations have only been required to collect and remit sales tax in jurisdictions where they have “nexus” in the form of a physical presence (Quill v. North Dakota, 504 U.S. 298). But in recent years, states have attempted to establish nexus based on economic presence. One such state is South Dakota. In May 2016, the state passed legislation that required any entity with annual sales of $100,000 or more involving at least 200 transactions to collect and remit sales tax regardless of whether the seller had physical presence within its borders. The law was ruled unconstitutional by the South Dakota Supreme Court, but the U.S. Supreme Court has now heard the case (South Dakota v. Wayfair, Inc.). A final decision is expected in June 2018.

If the U.S. Supreme Court overturns Quill, the physical presence standard will no longer determine whether a seller is obliged to collect and remit sales tax. Sellers could be required to comply with thousands of state and local taxing jurisdictions with varying definitions of nexus, taxable goods, and enumerated services. Some have urged Congress to impose uniformity on taxation of interstate commerce.

How we can help

CLA’s nonprofit tax professionals can help you determine where you should be registered for state sales and use tax by conducting a state tax nexus study. We will continue monitoring the progress of this Supreme Court case, and keep you informed on how you can manage your sales tax obligations from state to state.