Supreme Court overturns Quill’s physical presence requirement

By Sally P. Schreiber, J.D.

The U.S. Supreme Court on Thursday held that states can assert nexus for sales and use tax purposes without requiring a seller’s physical presence in the state. The decision in South Dakota v. Wayfair, Inc., et al, No. 17-494 (U.S. 6/21/2018), overturns prior Supreme Court 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), both of which had required retailers to have a physical presence in a state beyond merely shipping goods into a state after an order from an in-state resident before a state could require the seller to collect sales taxes from in-state customers. The Court concluded that each decision was an “incorrect interpretation of the Commerce Clause” (slip op. at 10).


South Dakota, like many other states, imposes a sales tax on the sale of goods in the state and a complementary use tax. Because compliance with the use tax on untaxed purchases from out-of-state vendors is low, South Dakota estimates it loses between $48 million to $58 million a year in sales-and-use-tax revenue from sales to state residents by out-of-state businesses that do not collect sales tax for the state. Because it has no income tax, its sales tax revenue makes up about 60% of the state’s funds each year, so the loss of those funds is substantial (slip op. at 2–3).

To try to counteract the loss of this revenue, in 2016, South Dakota enacted a law, S.B. 106, requiring out-of-state sellers that annually delivered more than $100,000 of goods or services into the state or engaged 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 (slip op. at 3). South Dakota’s new law prohibited retroactive application of this requirement and also provided that the law could be stayed until it had been determined to be constitutional.

Because South Dakota’s Legislature was aware that its new law would be unconstitutional unless Quill was overturned, it included a provision for expeditious judicial review if the law was challenged. Therefore, South Dakota filed a declaratory judgment action in state court against Wayfair Inc.,, and Newegg Inc., all large internet merchants that have no employees or real estate in South Dakota and do not collect sales tax for the state. The state also sought an injunction requiring these companies to register for licenses to collect and remit sales taxes as required under the act. The companies moved for summary judgment in state court, arguing that the act is unconstitutional. After the law was declared unconstitutional by South Dakota courts, the Supreme Court granted certiorari.

Supreme Court decision

The Supreme 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 the Quill decision given economic and technological changes since it was decided in 1992. He was joined by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito, and Neil Gorsuch. Thomas and Gorsuch filed concurring opinions. Chief Justice John Roberts wrote a dissenting opinion, joined by Justices Stephen Breyer, Sonia Sotomayor, and Elena Kagan.

In deciding to overrule Quill and Bellas Hess, the Supreme Court found that the rule in Quill banning sales tax collection when businesses lack “physical presence” in a state was an incorrect interpretation of the Commerce Clause. The Court criticized the Quill decision on several grounds. First, the physical presence rule is not a necessary interpretation of the “closely related” nexus requirement from Complete Auto Transit v. Brady, 430 U.S. 274 (1977). Second, the Court found that Quill creates, rather than resolves market distortions, calling it a “judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services” to a state’s residents (slip op. at 13). Third, the Court found that Quill imposes “arbitrary, formalistic” distinctions that run counter to the Court’s modern precedents under the Commerce Clause (slip op. at 10). For example, a business that holds a few items of inventory in a state would be required to collect sales tax in the state under Quill, while an online retailer with pervasive sales in the state would not, a distinction that the Court said, “simply makes no sense” (slip op. at 14).

With regards to stare decisis, the doctrine that court precedent generally must be followed, the Court found that the doctrine does not justify the prohibition of a valid exercise of the states’ sovereign power, and, if a prior decision did so, the Court must be vigilant to correct its error, and that the Court should not ask Congress to fix an error of the Court’s making.

The Court noted that the Quill rule actually discouraged interstate commerce by creating incentives to avoid economic activities in many states. The Court continued: “When the day-to-day functions of marketing and distribution in the modern economy are considered, it is all the more evident that the physical presence rule is artificial in its entirety” (slip op. at 14).

The Court also rejected arguments that the physical presence test aids interstate commerce by preventing states from imposing burdensome taxes or tax collection obligations on small or startup businesses. The Court concluded that South Dakota’s tax collection plan was designed to avoid burdening small businesses and that there would be other means of protecting these businesses than upholding Quill (slip op. at 22).

Finally, the Court stated that in the absence of Quill and Bellas Hess, the first prong of the Complete Auto test simply asks whether the tax applies to an activity with a substantial nexus with the taxing state, and in South Dakota’s case, the nexus is clearly sufficient, because the South Dakota sales tax act applies only to sellers who engage in a significant quantity of business in the state, and Wayfair,, and Newegg are large, national companies that undoubtedly maintain an extensive virtual presence.

Therefore, the judgment of the South Dakota Supreme Court invalidating South Dakota’s out-of-state sales tax collection requirement was vacated and remanded for “further proceedings not inconsistent with this opinion,” i.e., it allows South Dakota’s law to be put into effect by lifting the state’s injunction (slip op. at 24).

In his dissenting opinion, Roberts argued that, although he agreed that Bellas Hess was wrongly decided and that the enormous growth in internet commerce in the interim years has changed the economy greatly, Congress was the correct branch of government to establish tax rules for this new economy. He also took issue with the majority’s conclusion that the burden on small businesses would be minimal.

Looking forward

Congress may now decide to move ahead with legislation on this issue to provide a national standard for online sales and use tax collection, such as the Remote Transactions Parity Act or Marketplace Fairness Act, or a proposal by Rep. Bob Goodlatte, R-Va., that would make the sales tax a business obligation rather than a consumer obligation. Under that proposal, sales tax would be collected based on the tax rate where the company is located but would be remitted to the jurisdiction where the customer is located. The AICPA has submitted comments on the Marketplace Fairness Act, noting some concerns and suggested improvements if Congress decides to proceed with such a bill.

Last week, the AICPA testified and submitted written comments opposing the Multistate Tax Commission’s model sales-and-use-tax notice and reporting statute. The AICPA urged the MTC and its member states to not adopt the draft model statute because it is contrary to good tax policy, has many costs and few benefits, and will lead to further complications and burdens on customers, sellers, marketplace facilitators, and referrers, as well as the state.

Sally P. Schreiber ( is a JofA senior editor.

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