Does Wayfair Have Just What You Need?

by Paul Leonard

One of the more important decisions of the United States Supreme Court in 2018, at least for states, was the Court’s decision in South Dakota v. Wayfair (Wayfair). As widely reported, the Court held in Wayfair that an Internet seller of goods with no physical presence in South Dakota could be required to collect sales taxes on sales to South Dakota residents. This decision overturned previous Court decisions holding that such sellers were not subject to state sales tax requirements in similar situations. States have obviously hailed the Wayfair decision (41 states, two territories and the District of Columbia asked the Court to rule in favor of South Dakota) and many have amended or are in the process of amending their tax laws to meet the parameters set forth in Wayfair.

Specifically, in Wayfair the Court found that the Commerce Clause of the Constitution was not violated by imposing state sales tax requirements on a seller with no physical presence of any kind in South Dakota. The Court further found that to require such physical presence in the State would actually disadvantage in-state sellers. The Court stated that based upon current e-commerce, “the physical presence rule … has limited States’ ability to seek long term prosperity and has prevented market participants from competing on an even playing field.” Based on these findings the Court decided that the seller had sufficient “economic and virtual contacts” with South Dakota, and thus was subject to sale tax collection requirements. The Court did not define “sufficient economic and virtual contacts,” but approved South Dakota’s requirement that an Internet seller must have $100,000 or more in sales to State residents to be subject to the sales tax requirements.

Banks have at times, along with other businesses, taken the position that regardless of revenue derived from a State’s residents, excise, income, and other revenue taxes are not owed to a State if the institution has no physical presence there. Additionally, in states that impose sales taxes for services, banks may not have collected sales taxes on taxable services provided to such State’s residents. Banks relied upon Supreme Court decisions prior to Wayfair for such positions. There was no concept of “economic contacts” (or “virtual contacts”) in those prior decisions. Some States did have laws (most of which were drafted prior to the advent of the Internet) that could be read broadly enough to impose taxes on banks based upon lending and other banking activities with State residents, but few States attempted to impose those taxes if the bank had no physical presence in the State. Now, after Wayfair, banks should anticipate that States will try to enforce current laws or pass new ones in an attempt to collect more tax revenue.

Although the Wayfair decision only addresses sales taxes, it naturally follows that the same concepts set forth in Wayfair could be used by a State in an attempt to impose excise, income, and other types of revenue taxes on out-of-state businesses, even though the business has no tangible personal property, offices, or employees in the State. This concern has caused some companies to establish or consider establishing financial statement reserves for the payment of potential State taxes. A bank with current business activities in States in which it has no physical presence and pays no taxes should begin to assess its business activities for potential tax risks. The business activities to review should include (i) the issuance of credit cards, (ii) all types of loans, (iii) accepting of deposits, and (iv) providing financial services (which presumably could include trust services) to or for residents of a State. The amount of activity/revenue derived from residents of a State could, in the future, become a very important tax analysis.

With their ever-growing demand for increased revenue, it is foreseeable that States will increase demands on businesses for the payment of taxes deemed to be sourced within the State. It will be prudent for all businesses, including banks, to be ready for that time.

Paul Leonard is of counsel in McGlinchey Stafford’s Birmingham office, where he provides taxation, corporate, and real estate counsel to businesses including financial institutions nationwide. For more on regulations impacting state-based taxation, you can reach Paul at or (205) 725-6408.