Responsible person rules in the wake of Wayfair: Help clients avoid becoming personally liable for their company's uncollected sales taxes.

Author:Hopkins, Chris

The U.S. Supreme Court's June 2018 landmark ruling in South Dakota v. Way fair, Inc., 138 S. Ct. 2080 (2018), has led to greatly increased exposure to sales tax for businesses with interstate sales. Because of the responsible person rules existing in many states, the increased exposure to sales taxes on interstate sales caused by the decision also could lead to a substantial increase in exposure to personal liabilities for a wide range of unsuspecting individuals working for these businesses--from corporate officers to tax and finance managers.

And it is not only sellers of tangible property and their employees who could get caught up in the expanding web of economic nexus and tax liability. Sellers of services and digital products--including cloud computing, information services, data processing, audio and video content, and various online subscriptions--are now more vulnerable than ever, leaving individuals who are responsible persons for those companies at a greater personal risk.


Tax nexus is the amount of contact a business must have with a jurisdiction before the jurisdiction can subject the business to a tax. The Supreme Court's Wayfair decision overruled nexus precedent for sales and use taxes dating to 1967. That year, in National Bellas Hess, Inc. v. Department of Rev. of III., 386 U.S. 753 (1967), the Court heard the appeal of an Illinois Supreme Court decision that required an out-of-state retailer to collect and remit tax on sales made to consumers who purchased goods for use within the state.

The U.S. Supreme Court ruled that a mail-order company with no connection to customers in Illinois other than by "common carrier" or the U.S. mail lacked the requisite minimum contacts with the state that the Due Process and Commerce clauses of the U.S. Constitution require to impose taxes. The Court held that a state could require a retailer to collect a use tax only if the retailer maintained a physical presence, such as retail outlets, solicitors, or property, in the jurisdiction.

Twenty-five years later, in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), the Supreme Court reexamined the physical presence requirement in a similar case involving mail-order sales. Although the Court overruled its earlier holding regarding due process, it upheld the Commerce Clause ruling, based on the principle that the clause prohibits state taxes on activities that lack a "substantial nexus" with the state.

The physical presence rule established in Bellas Hess and affirmed in Quill generated much criticism in recent years, as brick-and-mortar stores have faltered and online sellers assumed a prominent role in the marketplace. In 2018, online retail sales were estimated at $513.6 billion and represented almost 9.7% of total U.S. retail sales. That is a lot of potential tax revenue for states to forgo. (For more about the Supreme Court's ruling in Wayfair and the need for heightened sales tax compliance, see "Sales Tax Compliance Post- Wayfair," JofA, Aug. 2019,

Contrary to the expectations of many, the Supreme Court found that the facts in Wayfair satisfied the substantial nexus requirement. According to the Court, nexus is established when the taxpayer "avails itself of the substantial privilege of carrying on business" in the jurisdiction. The amount of business the state requires to trigger the tax could not occur unless a seller has so availed itself.

Since the ruling, the District of Columbia and all 45 states with sales and use taxes have enacted or are expected to enact nexus rules similar to those of South Dakota, albeit some with different nexus thresholds and effective dates.


Sales and use taxes are "trust fund taxes," or taxes that the collector holds "in trust" for the state until remittance. These taxes are imposed not on the seller but on the purchaser or user. As such, the laws passed in the wake of Wayfair do not increase tax liability for sellers but allow states to shift the collection and remittance obligation from the customer to the seller.


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