The Supreme Court Already Settled This — For Sales Tax
In South Dakota v. Wayfair (2018), the Supreme Court ruled 5-4 that physical presence is NOT required for tax obligations. Economic presence — measured by sales volume — is sufficient. This principle has been applied to sales tax in all 50 states. It has NOT been applied to income tax. That's the gap.
The Ruling
Case: South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018). The Court overruled Quill Corp. v. North Dakota (1992) and National Bellas Hess v. Illinois (1967).
Holding: “Physical presence is not necessary to create a substantial nexus” under the Commerce Clause.
From the Majority Opinion
“The physical presence rule of Quill is unsound and incorrect… Each year, the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the States.”
— Justice Kennedy, writing for the 5-4 majority
Source: Supreme Court Opinion
Source: Justia Case Summary
The South Dakota Standard
South Dakota’s law required sales tax collection from sellers meeting either threshold. The Court upheld this as constitutional. This became the model for economic nexus nationwide.
$100K+
In annual sales to state residents
200+
Separate transactions with state residents
Either threshold triggers sales tax collection obligations — no physical presence required.
What Changed After Wayfair
Within 2 years, virtually every state adopted economic nexus standards for sales tax. Amazon and other marketplaces now collect sales tax as “marketplace facilitators.”
45+
States adopted economic nexus laws within 2 years of Wayfair
100%
Of major marketplaces now collect sales tax as facilitators
Solved
Sales tax collection from remote sellers is largely resolved
The Gap: Income Tax
Wayfair solved sales tax nexus. But it has NOT been applied to income tax at the federal level. This is the gap AEBA is asking Congress and the IRS to close.
The Comparison
After Wayfair (sales tax)
$100K in sales to state residents = sales tax nexus. No physical presence needed. Fully enforced.
Today (federal income tax)
$10M in U.S. sales + inventory in 5 warehouses + 50,000 customers = $0 income tax. Not enforced.
A Chinese seller with $10M in U.S. marketplace sales, inventory in 5 American warehouses, and 50,000 American customers has deeper economic presence than most of the out-of-state retailers Wayfair covered. Yet they pay $0 in federal income tax.
What AEBA Is Asking For
Foreign sellers hide behind the 1987 treaty to claim no U.S. tax nexus. But Wayfair confirmed what IRC §864 already establishes: economic activity in the U.S. creates tax obligations — physical presence is not required. The Supreme Court called the physical presence rule “unsound and incorrect.” IRC §864 and the TCJA provide the legal authority. Wayfair provides the precedent. Marketplace withholding under FIRPTA (§1445), §3406, and §1441 provides the collection mechanism. The law exists. It needs to be applied.
⚖
Legal Principle
Established by the Supreme Court in Wayfair (2018)
⚙
Enforcement Mechanism
Marketplace facilitator infrastructure already exists
❓
Missing Piece
Political will to apply it to federal income tax