States can now force retailers without physical presence to collect sales tax, Supreme Court says

June 30, 2018

On June 21, 2018, the United States Supreme Court issued its opinion in South Dakota v. Wayfair, Inc.,[1] in which the Court, by a 5-4 vote, overruled over 50 years of precedent established by its rulings in Quill[2] and Bellas Hess,[3] and held that the physical presence nexus rule is “unsound and incorrect.”[4]

This case centered around a South Dakota law that the state enacted on March 22, 2016.  That law imposed sales tax nexus on businesses that, during the current or prior calendar year, either have more than $100,000 of gross revenue or engage in at least 200 separate transactions from sales of tangible person property, any product transferred electronically, or services for delivery in the state.[5]  Since the law imposed sales tax nexus without physical presence, it was challenged in the South Dakota courts.  The South Dakota Supreme Court struck down the law since it was contradictory to the United States Supreme Court ruling in Quill.  South Dakota then appealed to this Court.

The Case for Overturning Quill

As an initial matter, the Court stated that Quill is “flawed on its own term,” and provided several reasons.  First, the substantial nexus requirement under the Commerce Clause does not require physical presence, and the administrative burdens of compliance are unrelated to the level of physical presence.  For example, a small company with one salesperson in each state has to collect and remit sales tax everywhere, but a large Internet company with all employees in one state escapes the compliance burden.

Second, the physical presence requirement creates, rather than resolves, market distortions.  The goal of the Commerce Clause is to prevent states from engaging in economic discrimination and to put businesses on a level playing field, but Quill had the opposite effect.  Under Quill, local business and interstate brick and mortar stores were put at an economic disadvantage to remote sellers.  In addition the rule provides businesses with an incentive to avoid creating physical presence, which means “that the market may currently lack storefronts, distribution points, and employment centers that otherwise would be efficient or desirable.”

Third, physical presence is an arbitrary and formalistic rule that “treats economically identical actors differently, and for arbitrary reasons.”  For example, consider two businesses that sell furniture online.  One has a small warehouse in North Sioux City, South Dakota, and the other has a major warehouse just across the border in South Sioux City, Nebraska, and maintains a virtual showroom on its website accessible in all states.  Under these facts, the first company has to collect sales tax in South Dakota (even if the sale has nothing to do with the small warehouse), whereas the second company does not.

Next, the Court explained that overruling a prior decision is not a path it takes without the “utmost caution,” but that the explosion of the Internet and E-commerce makes clear that Quill “must give way to the far-reaching systemic and structural changes in the economy . . .caused by the Cyber Age.”  In addition, the Court noted other problems resulting from Quill, such as the fact that states are losing billions of dollars a year in sales tax revenues and that the physical presence rule has not been clear and easy to apply over the years.

Addressing Nexus

Commerce Clause principles still require that there be substantial nexus with the taxing state, and having just dispensed with the physical presence requirement, the Court states that such nexus is established “when the taxpayer [or collector] ‘avails itself of the substantial privilege of carrying on business’ in that jurisdiction.”

Applying that to South Dakota’s law, the Court concludes that nexus is clearly sufficient “based on both the economic and virtual contacts [that the taxpayer has] with the State.”  Since South Dakota’s law applies only to businesses that sell at least $100,000 of goods or services into the state or engage in at least 200 separate transactions for the delivery of goods into the state, any taxpayer that meets either of those thresholds must have availed itself of the substantial privilege of carrying on business in the state.

At the end of its opinion, the Court notes that there may be other Commerce Clause principles that could invalidate the South Dakota law, but the Court is not tasked with addressing those issues in this case.  Nonetheless, the Court goes on to note several features of South Dakota’s law that are “designed to prevent discrimination against or undue burden on interstate commerce:” (1) that law contains a safe harbor for those that transact limited business in the state (i.e., the economic thresholds); (2) the law prohibits retroactive application so businesses don’t have to worry about liability from prior periods; and (3) the state is a member of the Streamlined Sales and Use Tax Agreement.[6]

What’s Next?

Many states have already enacted laws similar to South Dakota and are likely ready to begin enforcement as a result of this case.[7]  However, not all of those laws contain the three features that the Court mentions above.  While this case may have put to rest an issue that has been at the forefront of the state and local tax community (i.e., physical presence), it highlights several more that may need to be resolved in the future, including:

  • What does it mean for a business to “avail itself of the substantial privilege of carrying on business?”
  • Are the economic thresholds noted above the minimum requirements?
  • What if a particular state’s rules don’t preclude the possibility of retroactive enforcement?
  • What if a state is not a member of the Streamlined Sales and Use Tax Agreement?
  • What does it mean to sell services into the state? Sales tax sourcing for services has been a very complex area with limited guidance.  With these new nexus rules relying on the sourcing principle, clear guidance will be needed for proper application.
  • Will Congress enact sales tax nexus legislation to limit the impact of this decision?
  • Will this decision impact income tax nexus?

In the meantime, businesses must now work with their tax advisors to redo their nexus analyses in light of the Court’s decision and each of the state’s rules regarding nexus, taxability and sourcing.  There is no doubt that businesses will find themselves required to collect and remit sales tax and to files sales tax returns in many more jurisdictions.

As a result of this decision, both sellers and consumers are likely to see added costs.  Many consumers who made purchases where sales tax was not charged may not have realized that they were required to self-remit use tax to the state (this is one of the reasons why the states almost unanimously asked the Court to overturn Quill).  Now, sales tax will likely be charged up front, adding to the cost of goods and services purchased.  For sellers, there will be the immediate costs associated with working with advisors to understand their compliance obligations updating systems/processes as necessary (e.g., where they need to collect and remit, whether their products/services are taxable and at what rates, etc.) as well as the ongoing additional costs of compliance (e.g., preparing and filing sales tax returns, maintaining exemption documentation, handling more audits/notices, etc.).

Aprio’s SALT team has extensive experience in the areas of sales tax nexus, taxability and sourcing, and we are available to help your business navigate this brave new post-Quill sales tax world.  We will partner with you to ensure that you understand your sales tax obligations, and we will assist with your sales tax compliance needs so that your business does not incur unexpected sales tax liabilities and penalties.

Check out all Aprio articles on Wayfair and its aftermath here.

Interested in speaking with someone? Contact Jeff Glickman.

Read more about Wayfair and its impact here.

Interested in speaking with someone? Contact Jeff Glickman.

[1] 585 U.S. ___, No. 17-494 (June 21, 2018).

[2] Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

[3] National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753 (1967).

[4] We have written several articles addressing the lead up to this case.  For example, see our January 2018 newsletter article on this subject.

[5] South Dakota S.B. 106.

[6] The Streamlined Sale and Use Tax Agreement is an agreement adopted by about half of the states that is intended to simplify and modernize sales and use tax administration in order to reduce the compliance burden on businesses.  For more information, see

[7] For a summary of some of these, see our article from the November/December 2017 SALT Newsletter as well as this article that discusses Georgia’s recent legislative enactment.