With the continued proliferation of online sales projected to reach $414 billion by the end of 2018, the states, eager to capture their share of this online revenue, have reached for businesses that have no physical contact with the state.

Until the U.S. Supreme Court’s ruling last week in South Dakota v. Wayfair, 2018 WL 3058015 (Sup. Ct. June 21, 2018), physical contact was the traditional hallmark for establishing “nexus.”  Nexus is the link between an out-of-state business and a given state that provides that state with the jurisdiction under the U.S. Constitution to impose sales tax on businesses participating in inter-state commerce.

The Supreme Court finally caught up to the changing market place last week overturning in Wayfair the “physical presence” test established in Quill Corp. v. North Dakota, 504 U.S. 298 (1992).  The Court ruled that the physical presence test is “unfair and unjust” to the brick and mortar businesses competing against virtual competitors.  To level the playing field, South Dakota passed an “economic nexus” law requiring out-of-state sellers to collect sales tax if they derive more than $100,000 of gross revenue from the state or conduct more than 200 transactions in the state.  South Dakota prevailed on the constitutional challenge brought by the e-commerce company Wayfair even though the law imposed sales tax without requiring a business to have physical presence in the state.

The Court in Wayfair expressed that the states should be allowed to “seek long-term prosperity” through economic nexus legislation (estimates indicate the physical presence test has cost states billions of dollars in uncollected sales tax).  In fact, many states’ laws had already blurred the once bright-line Quill physical presence rule.  For example, New York passed click-through nexus legislation in 2008, creating a presumption of physical presence for online retailers that had referral agreements with residents of the state as a result forcing online retailers to collect sales tax on New York shipments.  The online retailers Overstock and Amazon challenged this law but it was upheld by New York’s highest court.  In the aftermath of this decision, New Jersey passed its own similar law and also entered into a tax collection and job creation agreement with Amazon.  The online giant conceded having nexus with the state and then, as an apparent concession, built fulfillment distribution centers in New Jersey in conjunction with collecting sales tax on its online sales.

Under this new Supreme Court precedent, New York, New Jersey and other states do not need to prove physical presence by indirect means, but can move forward with implementing legislation to directly impose sales tax on online businesses on receipts generated from the state.

In light of the Supreme Court decision and the liberation of the states from the yoke of the physical presence test, online and other hybrid businesses should not delay conducting “nexus studies” of their business practices, which we regularly conduct for our clients.  This helps companies determine and plan for potential exposure in an audit, including the personal liability exposure for owners and officers for uncollected sales tax that is not dischargeable in bankruptcy.


In In re Stockdale, the New Jersey Supreme Court addressed the availability of punitive damages in estate disputes involving undue influence claims. 196 N.J. 275 (2008).

The Stockdale case concerned the propriety of a punitive damage award entered against two individuals who pressured an elderly woman to sell her residence on inequitable terms and convinced her to create a new will naming one of them as the sole beneficiary of her estate.  These individuals offered the new will for probate following her death, but a beneficiary under the woman’s prior will argued it was invalid because they had procured it through undue influence.  Agreeing with the beneficiary, the trial court judge refused to probate the new will and ordered the individuals to pay the attorneys’ fees incurred by the beneficiary as a form of punitive damages.

On appeal, the Supreme Court noted that punitive damages are typically inappropriate when an estate dispute involves family members and a claim that one member employed undue influence to gain a greater share of an estate’s assets.  Under those circumstances, the Court indicated that the correct remedy generally involves reducing the inheritance or statutory commissions the family member otherwise would have received from the estate by any amount obtained through undue influence.  In contrast, the Court noted that a punitive damage award remains a viable possibility when those accused of undue influence do not possess any lawful inheritance or commission rights to reduce, such as third parties who are essentially strangers to the decedent.  In those situations, the estate may sue to recover both compensatory and punitive damages.

The Court ultimately concluded that the individuals who had unduly influenced the elderly woman could be held liable for punitive damages because they were unrelated to her and did not possess any lawful inheritance or commission rights to abate.  Nevertheless, the Court rejected the method the trial court judge used to calculate the award and instructed the judge to reconsider the matter in light of the evidence and general standards for awarding punitive damages.  Both the trial court and Appellate Division recently concluded that the beneficiary had failed to establish the requirements for a punitive damage award.  See In re Stockdale, No. 4037-10 (App. Div. Jan. 29, 2013, unpublished opinion).

In sum, the Court’s decision has the practical effect of eliminating punitive damage awards in most estate disputes where a decedent’s family member is accused of undue influence, while at the same time confirming that wrongdoers outside the decedent’s family face the specter of punitive damages when they obtain an estate’s property through undue influence.

The U.S. Supreme Court recently held that an overstatement of basis did not trigger the extended six-year statute of limitations assessment period under Internal Revenue Code Section 6501(e)(1)(A) (United States v. Home Concrete & Supply LLC, U.S., No. 11-139, 4/25/12).

The Court in a 5-4 split decision affirmed a U.S. Court of Appeals for the Fourth Circuit decision holding that an understatement of income resulting from overstatement of basis in goods sold is not an omission from gross income triggering the extended assessment period.

Under Section 6501(e), the normal three (3) year statute is extended to six (6) years if the taxpayer omits gross income in excess of 25% of the amount stated on the return.  This decision essentially clarified the Court’s 1958 ruling in Colony, Inc. v. Commissioner in determining that misstatements of basis in property do not fall within the scope of Section 6501(e)(1)(A) which calls for the extended limitations period.  In addition, the decision rejected the Government’s argument that a recently promulgated Treasury Regulation interpreting the statute in its favor should be given deference since Colony had already interpreted the statute and any construction inconsistent with Colony was not available.