The standard in determining whether a state tax law applies to an activity depends on whether that activity has “substantial nexus” with the taxing state. Previously, physical presence has been used as the standard in determining economic nexus with a state. However, on June 21, 2018, in the case of South Dakota v. Wayfair, the U.S. Supreme Court overturned its prior precedents holding the physical presence rule as an “unsound and incorrect” interpretation of the Commerce Clause which was creating unfair and unjust marketplace distortions favoring remote sellers.
With the rise of the digital economy, states have lost significant sales tax revenues because they have been unable to tax online / internet sales under the old physical presence standard. The Court now holds that vendors also have substantial nexus through “extensive virtual presence”, based on gross sales and transaction volume thresholds which differ from state to state. Beginning December 1, 2018 Connecticut has enacted economic nexus laws targeting out-of-state sellers making $250,000 in gross receipts and 200 or more separate retail sale transactions on the previous calendar year’s sales.
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