Stand Your Ground! Substantial Nexus Lives After Wayfair -

The U.S. Supreme Court decided in South Dakota v. Wayfair, Inc. that the U.S. Constitution does not require a physical presence in a taxing state in order for the state to impose a sales and use tax collection obligation on an out-of-state seller.1 It is time to decipher what remains of the substantial nexus standard. The good news is that the Court made clear in Wayfair that a substantial nexus between the taxing state and the business that it seeks to tax is required, albeit not a physical presence bright-line.2 The Court framed its overruling of National Bellas Hess, Inc. v. Department of Revenue3 and Quill Corp. v. North Dakota4 as a natural progression in its Commerce Clause jurisprudence away from “arbitrary, formalistic distinction(s)” and toward “a sensitive, case-by-case analysis of purposes and effects.”5 Therefore, in the absence of a bright-line, formalistic substantial nexus rule, the key will be to understand the relevant factors to consider when performing a substantial nexus analysis and how these factors relate to whether a state can successfully assert a taxable nexus.

SUBSTANTIAL NEXUS BEFORE WAYFAIR -

The U.S. Supreme Court framed its 1977 decision in Complete Auto Transit, Inc. v. Brady as a rejection of formalism.6 There, the Court overruled a long line of cases that had held that any state tax imposed on the “privilege of doing business” was per se unconstitutional if the tax applied to interstate commerce.7 In overruling this formalistic, bright-line rule, the Court stated that a proper constitutional analysis of a state tax considers “not the formal language of the tax statute but rather its practical effect.”8 In determining the practical effect of a state tax, the Complete Auto Court reminded us that it has considered whether “the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.”9 In doing so, the Court pulled together threads of state tax analysis that, until then, had been separate.