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by Michael J. Gamboa, J.D., and Martin A. Joseph

Crowe LLP is an IMA B2B Partner

The sales and use tax landscape is rapidly changing in the wake of the U.S. Supreme Court June 21 decision in South Dakota v. Wayfair. The decision overturned the longstanding bright-line rule from Quill Corp. v. North Dakota, which required that a taxpayer have some physical presence in a state in order for that state to be able to impose a filing and collection responsibility for sales and use taxes.

The Wayfair decision removed the requirement for physical presence after reviewing the South Dakota statute, which provided for the following:

  • Prospective application. The effective date of the law was tied to a decision by the highest court validating the constitutionality of the statute.
  • Small business threshold. The law applied to out-of-state sellers who had more than $100,000 in sales or 200 transactions per year.
  • Streamlined Sales Tax Project (SSTP). South Dakota is a member of the SSTP and has simplified rules consistent with the 19 other members of the SSTP. It also has state-funded compliance software with audit protection.

Businesses traditionally have relied on this bright-line test for protection against the burden of compliance and sales tax liability. Many states passed economic nexus sales and use tax statutes (nexus measured on number of transactions or sales volume rather than physical presence) from 2016 to 2018. Businesses now must more carefully monitor sales activity to determine filing requirements or register in additional states proactively. No state yet has announced an intention to apply its economic nexus provisions retroactively.

Many manufacturers not only have relied upon the Quill bright-line physical presence test in the past, but also have taken the position that, since they make no sales to end users, the manufacturers have no taxable sales and thus do not have sales tax liability and do not need to file. In fact, it is common for states on audit to assess sales tax on manufacturers when they do not have proper resale or other exemption documentation. The challenges that are becoming more prevalent for manufacturers in state sales tax audits include:

  • States increasingly are using customer audits to generate leads for audits of unregistered, out-of-state manufacturers.
  • During an audit, it might be difficult, or even impossible, to obtain documentation from customers who have gone out of business or who have been acquired by other companies.
  • Auditors are more strictly scrutinizing exemption certificates and disallowing these if they are incomplete or contain errors (for instance, completed using a federal employee identification number instead of a registration number or listing the wrong state).

Manufacturers should prepare for filings in additional states because the thresholds are not specifically tied to taxable sales. Regardless of the thresholds or decisions on which states to register in, manufacturers can protect themselves from aggressive states seeking jurisdictions over out-of-state manufacturers by collecting and validating exemption documentation from all customers and collecting sales tax from all customers without exemption certificates.


This is an original article written for the IMA by Mike Gamboa and Marty Joseph. For more information, contact Mike Gamboa at, or Marty Joseph at