U.S. Supreme Court Overrules Quill in Wayfair Sales Tax Nexus Case

Sellers can have sales tax nexus with South Dakota even when they do not have a physical presence in South Dakota, under South Dakota v. Wayfair. The U.S. Supreme Court found that large, national companies with an extensive virtual presence in South Dakota are engaging in a “significant quantity of business.” In making its decision on the presence required in a state to create sales tax nexus, the Court overruled U.S. Supreme Court precedent, including Quill v. North Dakota.

Sales or Economic Presence in South Dakota

South Dakota sought to make four retailers liable for its sales tax based on the level of sales activity that the retailers had in South Dakota. None of the retailers had a physical presence in the state as defined under state law. Instead, South Dakota relied on a law that set forth thresholds to gauge a retailer’s presence in South Dakota based on its sales activities.

The retailers refused to comply with South Dakota’s rules, relying on the Supreme Court’s physical presence rule in Quill. In Quill, the Court held that a retailer must have physical presence in a state before it could be held responsible for sales tax in that state.

Supreme Court Overrules the Quill Physical Presence Standard

The Supreme Court held that physical presence is not necessary to create substantial nexus with a state. The Court decided that South Dakota may require remote sellers to collect and remit the sales tax when all the remote seller does in South Dakota is make sales to its residents.

The Quill Standard Helps Avoid Taxes

According to the Court, the physical presence standard Quill formulated under the Commerce Clause effectively works as a tax shelter. The standard allows businesses to limit their physical presence in a state to avoid collecting tax on their sales into that state. The Court overruled its physical presence standard on the grounds that U.S. Supreme Court law cannot create “artificial competitive advantages.”

The Quill Standard is Unworkable in Modern eCommerce

The South Dakota sales/economic presence standard does not unduly affect commerce in violation of the Commerce Clause. Present-day commerce, which is conducted under a vast virtual, internet presence, makes the physical standard presence unworkable.

The Quill Standard Erodes Confidence in State Tax Systems

Finally, the Court stated that the physical presence rule prevents states from making reasonable choices in structuring their tax systems. Further, it encourages consumers to avoid taxes that pay for services that create and secure an active market in a state. The sales tax burden shifts to only those consumers who make purchases from businesses with a physical presence. The result is eroded public confidence in the state tax system, and the Court will not allow its decisions to create inequitable exceptions to those tax systems.

Is the South Dakota Standard Valid?

Finally, the Court remanded the case to determine whether the South Dakota law violates the Commerce Clause. In the court’s opinion, several features of the law prevent discrimination between sellers:

  • the law’s safe harbor for sales activity in South Dakota;
  • no obligation to pay sales tax retroactively; and
  • South Dakota’s participation in the Streamlined Sales and Use Tax Agreement.

The slip opinion can be found on the U.S. Supreme Court’s website.

South Dakota v. Wayfair, Inc., U.S. Supreme Court No. 17–494, Slip Opinion, June 21, 2018

Learn about the decision in South Dakota v. Wayfair and get CPE Credit at CCH CPELink. Quill Overturned: How the Wayfair Decision Could Transform Sales Taxes Nationwide .

AUTHOR

Lisa Lopata

All stories by: Lisa Lopata