In Brief

The recent Supreme Court decision in South Dakota v. Wayfair will expand retailers’ responsibilities to collect sales taxes on out-of-state purchases. Although the Court’s rationale was that technological changes make the collection of sales taxes easier than ever, this change will likely disadvantage smaller business. The author reviews taxpayer compliance challenges presented by Wayfair given the wide range of state taxing jurisdictions, and suggests possible legislative remedies to help address the challenges.


The U.S. Supreme Court’s 2018 sales tax decision in South Dakota v. Wayfair, Inc. [138 S. Ct. 2080 (2018)] significantly changed the long-standing physical presence (nexus) rule articulated in the Court’s 1992 case, Quill Corp. v. North Dakota [112 S. Ct. 1904 (1992)]. The ruling in Quill recognized a requirement that vendors whose sales were otherwise subject to out-of-state sales tax collection and remittance be obligated to collect and remit sales tax from out-of-state purchasers where the vendor had a physical presence (i.e., a place of business such as an office) in the out-of-state sales tax jurisdiction where sales taxable items sold were delivered.

In Wayfair, the Court revisited this rule and decided that, given substantial technological changes in the contemporary business environment, particularly today’s internet-based e-commerce market, the ruling articulated in Quill has become outdated. The Court noted that adherence to the nexus requirement imposes a burden on states not receiving sales tax revenues due to out-of-state vendors not having a physical presence in purchasers’ states. Although out-of-state purchasers should comply with their states’ compensating use tax, many purchasers fail to do so, thus allowing revenue collection in the purchasers’ states to suffer. It is noteworthy that Congress had been giving consideration to legislation to address the matter in a coordinated manner, but had yet to do so when the Wayfair decision was announced.

The Court observed, in both the majority and dissent opinions, that changing the rule to one requiring states to collect and remit sales tax to states where the vendor does not have a physical presence nexus, as articulated in Quill, would pose burdens on smaller businesses. Such businesses do not have the financial resources of large businesses, such as Wayfair, that are needed to afford the accounting systems necessary to identify and track, and then remit, sales taxes to the many other states to which sales are delivered.

But the majority and dissent made very different assessments regarding this issue. The majority—taking the position that today’s pervasive interstate technological environment in itself provides a sufficient nexus to impose sales tax compliance requirements regardless of an out-of-state vendor’s physical presence nexus—indicated that the problem for small businesses is temporary, and that accounting software would become available at low cost to solve the problem. The minority, on the other hand, took the position that the majority sorely understated the problem of small business compliance with the Court changing the physical presence rule. The minority noted that approximately 10,000 U.S. state and local jurisdictions levy sales taxes, with varying tax rates and differing tax rules as to covered and exempted sales. The minority felt that Congressional legislation is needed and that the Court was not the best venue for providing solutions to the interstate sales tax issues.

For legal, equitable, financial, accounting, and other practical reasons addressed herein, it appears that the complexity of the matters presented in Wayfair, Quill, and other relevant sales tax cases deserves more consideration and analysis than the Supreme Court has provided thus far—and is likely capable of providing, as compared with a coordinated federal legislative response.

Although it appears that the Wayfair decision articulates a path for satisfactory relief for the states without affecting the status of large companies with a multistate physical presence, and also puts the legal responsibility for sales tax compliance in parity for all vendors, it is also clear that the ruling puts small, developing businesses at a comparative financial disadvantage, and may in fact provide a death blow to some businesses given the cost of compliance.

Interstate Sales Tax Challenges

At the time of the Wayfair decision, 45 states and the District of Columbia (D.C.) had broad-based sales and use tax statutes, whereas 5 states did not. Furthermore, only 6 states predicated tax compliance responsibility for vendors solely on a traditional nexus rule, with another 15 having traditional nexus supplemented by other predicates for compliance rules; 24 states plus D.C. had compliance rules that vary from traditional nexus entirely, but with distinct differences from the rule articulated in Wayfair.

According to the nonprofit Tax Foundation (, of the jurisdictions that impose sales- and use-tax, 38 states in 2018 collected for jurisdictional subdivisions such as counties; there were 9,998 total (state plus local) U.S. sales tax jurisdictions in 2014. This total included highs of 1,515 and 1,242 in Texas and Missouri, respectively, to single subdivisions in 9 states, including Connecticut and D.C. There were 231 subdivisions in California and 84 in New York, but only 2 in New Jersey, to note just a few other examples.

The tax rates vary significantly by state; in 2018, California had the highest state-level rate at 7.25%, and Colorado had the lowest at 2.9%. Subdivisions’ rates for which many states collect also vary widely, with some local rates exceeding the state-level rate. In 2018, the highest combined state plus local rate was 10.02% in Louisiana; the lowest was 1.76% in Alaska (local only).

The problems experienced by vendors include all of the compliance prerequisite variations, the multitude of state and locality sales tax jurisdictions, the frequency with which rates change, and the many variations in tax rates that are greatly compounded by myriad state and local rules. These identify which sales are subject to tax, which are exempted, which vendors are exempted and under what circumstances, and the different return filing and cash remittance filing deadlines, which even within states often vary from reporting period to reporting period with the volume of sales in a given period. Other special rules, such as New Jersey’s special exemption from tax for Salem County (which borders on sales-tax free state Delaware), muddy the vendor compliance waters as well.

Accounting systems and their sales tax compliance components, along with related internal controls, must effectively accommodate these many and varied legal rules, and track the location of purchasers, both as to state jurisdiction and locality, and in some circumstances, different delivery destinations (for example, where the purchaser is in one state but the delivery is made to a person in a different state). Systems must also account for sales returns and allowances and related adjustments of sales taxes owed to the various jurisdictions.

More complications lie in the challenge of how sales tax audits are to be handled by the many jurisdictions. It appears vendors will now increasingly face multiple jurisdiction audits. In addressing these, vendors may confront the issue of adjusting for the audit findings of one jurisdiction’s changes in a manner that affects a different jurisdiction, which may or may not agree with the first jurisdiction’s findings.

As addressed below, this additional new complexity results in very costly compliance, particularly for smaller businesses. As noted, large e-tailers such as Amazon have the resources to address the compliance challenges, and have done so successfully for many years under the Quill regime. Startup, small, and other developing and medium-sized vendors, on the other hand, are at a significant comparative disadvantage with respect to costs. The Court’s majority dismisses this problem as “temporary,” as smaller companies try to adjust to the expanded compliance under Wayfair. However, such challenges may be temporary inasmuch as the cost of compliance may doom some smaller vendors.

Addressing the Challenges

While acknowledging certain aspects of the internet sales tax challenges to startups and small businesses, the majority in Wayfair stated: “Eventually software that is available at a reasonable cost may make it easier for small businesses to cope with these problems … those systems may become available in a short period of time” (emphasis added). The Court also stated that small merchants in South Dakota are provided a “reasonable degree of protection” because its statute exempts merchants from collection requirements when a merchant does not do “a considerable amount of business in the state,” that the South Dakota law is not retroactive, and that South Dakota is a party to the Streamlined Sales and Use Tax Agreement (SSUTA; discussed below).

By themselves, these rationales for departing from the physical presence nexus rule rely upon the possibility of future software, joining the SSUTA, and the specific mitigating factors of the South Dakota statute itself (factors that may or may not exist in other states).

More importantly than it may appear from a plain reading of the majority opinion, however, is the Court’s notation that “Congress may legislate to address these problems if it deems necessary and fit to do so.”

This raises an important question: why did the Court choose to impact this area of tax law in a manner that, in a singular and noncoordinated fashion, provides a rule that is to immediately be employed in interstate and internet commerce by an extremely large and diverse combination of jurisdictions? Conversely, why did the Court’s majority not more affirmatively acknowledge that it would be preferable to address this issue in a simpler, coordinated, and fair way through federal legislation (or alternatively, more comprehensive state coordination via a more expansive and inclusive uniform state law), and thus encourage a solution that would be fair to all businesses and states?

The Limited Success of the SSUTA

The idea of commercially oriented “uniform state laws” has enjoyed a range of success since adoption of the Uniform Commercial Code (UCC) in 1953. That law has been adopted in all 50 states and D.C.; although it contains certain alternative provisions that individual states can choose to adopt, and despite individual state courts sometimes interpreting particular provisions in ways that differ from other states, the statute has worked well in a manner that has been effective in producing “national” law controlled by the states, as opposed to federal law passed by the federal government.

Other state efforts at uniform law have not had as much success, however. The SSUTA is a uniform state statute that standardizes sales taxes among the member states and provides simplified tax rate structures; requires a single, state-level tax administration using uniform definitions of products and services; and provides sellers access to sales tax administration software paid for by the states. Sellers who choose to use such software are immune from audit liability; at the time of this writing, however, since its target effective date of October 2005, the SSUTA had been adopted in just 23 states. The conceptual rationale for the law reflects both a lack of individual states’ and their businesses’ incentive to collect and remit sales taxes from out-of-state customers unless required to, and the failure of such purchasers’ compliance with, and effective in-state enforcement of, compensating use taxes within states.

The SSUTA does not appear to be on track to solving much of the aforementioned interstate sales tax challenges. Although its administrative streamlining and uniformity appear to benefit both states and businesses—particularly through simplified compliance and cost containment—the substantive problems of differing tax rates and rules for the many thousands of sales tax localities in the United States provide a disincentive to tax jurisdictions that might be hurt by substantive standardization of tax rates and subject matter of items and transactions taxed. Accordingly, it appears the evolution of the SSUTA from administrative streamlining to substantive uniformity nationwide is unlikely.


Inasmuch as the SSUTA is unlikely to effectively resolve the substantive issues identified, the administrative costs to startup and smaller businesses obviated by the combination of the multitude of interstate sales tax rules and the decision in Wayfair will be substantial. These costs will include those associated with the following:

  • Identification of the sales taxability of items and transactions in approximately 10,000 U.S. sales tax localities, including identifying exemption situations
  • Ascertaining the appropriate tax rate for each taxable transaction
  • Collecting and remitting the appropriate tax at the appropriate filing time, and giving due consideration to various jurisdictions’ shifting filing criteria (e.g., volume of sales in a reporting period)
  • Accounting for and reporting of adjustments for sales returns and allowances
  • Dealing with multiple states’ sales tax audit departments, including those that may come to conflicting conclusions regarding particular transactions
  • Purchasing and maintaining software systems to accommodate sales tax compliance needs, and absorbing consulting, accounting, and audit costs associated with compliance.

It is clear that smaller businesses that may have benefitted from the now former physical presence nexus rule of Quill are now at a comparative economic disadvantage vis-á-vis large companies that already have sophisticated multistate oriented accounting systems and resources and are able to comply under either the old nexus rule or the new one.

It is interesting to note that at a time when the federal political environment is such that Congress was motivated to be “small business–friendly,” as reflected in the new income tax pass through provisions of the 2017 Tax Cuts and Jobs Act, the Supreme Court produced such a small business–unfriendly decision as Wayfair. It is fair to ask: why did the Court not leave this problem to Congress to address in a coordinated federal way? Which in turn prompts the question: will Congress step in to provide relief?

The Need for Federal Action

Given the inherent right and power of sovereign governments to tax, it is not surprising that the federal government has not generally become proactively engaged with regard to state sales tax issues. It is clear to the author, however, that Congress may do so, through its powerful constitutional authority to regulate interstate commerce. The importance of interstate sales to the economy; sales tax revenues to the many states and localities that depend on them; competitive and legal fairness among vendors of all sizes; and the need for a coordinated singular, efficient, and cost-effective way to attain these ends, demands legislative action by Congress.

In response to the Wayfair decision and, using a “physical presence” test (as in Quill) in an effort to help protect vendors that made otherwise interstate taxable sales prior to the decision, as well as to provide some other limited vendor protections, sales tax legislation was introduced in the House of Representatives (“The Protecting Businesses from Burdensome Compliance Cost Act of 2018”). Introduction of this bill demonstrates the legislative power the federal government might exercise in addressing the overall sales tax nexus problems, but its scope would do very little to substantively address the issues.

Congress must address the issues far more comprehensively. One possibly effective approach would be to request that the states and interested vendors and other constituents participate in a singular cooperative legislative plan to govern this important area of interstate commerce. Once a consensus is reached, federal legislation could be passed to address the administrative and substantive ends of interstate sales taxation in a fair, efficient, and effective manner. In deference to state sovereignty, individual states would be invited and encouraged to join and participate in the federal plan, but not required to do so. If a state chooses to opt out, however, that state would be subject to the physical presence nexus rule of Quill. This would provide an incentive to participate in the federal plan rather than suffer the limited revenue reach of the physical presence rule.

Seeking Solutions

In important respects, the Supreme Court’s decision in Wayfair represents a classic dilemma of the American federal system. Here, the powers and interests of an individual state (regarding taxing power and tax revenue) are constrained by the actions or inactions of persons in other states (those remitting or failing to remit tax to the first state). The federal government may have the pertinent power overall (via its power over interstate commerce) to effect a remedy, but has not done so in a legislative manner—rather, by way of federal court action.

As such, the remedy posed is problematic. It is accomplished not through studied, compromised, and balanced legislation, but instead by a dramatic and instantly applicable legal change to a complex set of matters, the brunt of which falls disproportionately on a segment of the retail economy—smaller vendors—that is relatively weak and far less able than its larger competition to accommodate the change.

Perhaps underappreciated is the importance of sales tax revenues to the overall tax financing of the states. According to the nonprofit Urban Institute (…/sales-taxes), approximately 19% of all state tax revenues for 2015 were sales taxes, more than income, corporate, or property taxes. As such, states have an economic incentive to set aside other parochial interests, and thus be motivated to cooperate in coming to a centralized, uniform, and simplified approach to meeting interstate sales tax collection and remittance needs.

Clearly, the interstate sales landscape has evolved dramatically over the past two decades, largely due to the Internet. Accommodations must be made for changing times. Accordingly, due deliberation should be given to the important area of state sales tax. Given the complexity of the matters involved, and with due deference to states’ interests and authority, Congress should make it a goal to ensure fairness to all in resolving the issues posed by Wayfair.

Eugene T. Maccarrone, JD, CPA, is a professor of legal studies in business and accounting, in the Frank G. Zarb School of Business at Hofstra University, Hempstead, N.Y., whose support for this research and article is acknowledged.