Supreme Court overturns Quill’s physical presence requirement

States asserting nexus for sales taxes now have freer rein.
By Paul Bonner

In the closely watched Wayfair case, the U.S. Supreme Court held that for sales tax purposes, physical presence in a state is not necessary for a seller to have nexus with the state, overturning its precedent in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), and National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967).

In 2016, South Dakota enacted legislation requiring out-of-state sellers that annually deliver more than $100,000 of goods or services into the state or engage in 200 or more separate transactions for the delivery of goods or services into the state to collect and remit sales taxes to South Dakota. The respondents, Wayfair Inc., Overstock.com Inc., and Newegg Inc., are online merchants that the Court noted met the minimum sales or transactions requirement but did not collect South Dakota sales tax.

The Court's decision was written by Justice Anthony Kennedy, who in Direct Marketing Ass'n v. Brohl, 135 S. Ct. 1124 (2015), had suggested that it was time to reconsider Quill. In deciding to overrule it and Bellas Hess, the Court found that the physical presence rule incorrectly construed the U.S. Constitution's Commerce Clause and is not a necessary corollary of the "closely related" nexus requirement from Complete Auto Transit v. Brady, 430 U.S. 274 (1977). In addition, Quill creates, rather than resolves, market distortions and imposes "arbitrary, formalistic" distinctions, Kennedy wrote.

The case has obvious implications for states already seeking to collect sales taxes on sales to residents by out-of-state retailers and for other states that could soon join them (for more, see "Tax Clinic: Sales-and-Use-Tax Nexus in the Internet Age: What's a Retailer to Do?" The Tax Adviser, Oct. 2017, and "State & Local Taxes: States Probing Boundaries of 'Physical Presence,'" The Tax Adviser, Oct. 2017.

  • South Dakota v. Wayfair, Inc., No. 17-494 (U.S. 6/21/18)

— By Paul Bonner, a JofA senior editor.

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