Tax Executive

The state tax community is in familiar territory before the Supreme Court of the United States.1 We are in far less familiar territory, however, having captured the attention of nontax professionals, academics, the American public, and even the president of the United States.2 The eyes of the nation are fixed on South Dakota v. Wayfair.3 To some new followers, Wayfair merely raises questions about purchases made over the internet. It may also - heaven forbid - impose seemingly new taxes on purchases made on eBay and Amazon.

Authors: Jonathan E. Maddison

But we know better. We know Wayfair’s origin dates to (at least) 1967—and that use tax has been due on internet purchases all along. So, to the state tax community, Wayfair means so much more. For over fifty years, states and businesses have struggled to understand when a “substantial nexus” exists between a state and a taxpayer,4 leading to the unavoidable debate over two words: physical presence. The debate is best understood by asking two questions: what creates physical presence (an employee attending a tradeshow?) and who must be physically present (the taxpayer itself, or only a person with whom the taxpayer has a business relationship?). The Supreme Court’s final word on nexus for sales and use taxes came in 1992, leaving state judiciaries as the primary arbiters when states and businesses have disagreed Wayfair represents the culmination of this fifty-year debate by presenting the Court with a binary choice: affirm or reject the physical presence rule.for the past twenty-five years. Naturally, state judiciaries have resolved identical questions with contradictory answers, creating ambiguity, uncertainty, and unpredictability. These issues were (and continue to be) exacerbated by the evolution of technology and its impact on the national economy.

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