Sign In
  • InsideTrack
  • May 01, 2018

    Supreme Court Divided on Nexus for Internet Sellers

    A case before the U.S. Supreme Court could significantly change the sales and use tax nexus landscape in the U.S. With a final decision anticipated this summer in South Dakota v. Wayfair, Luona Hao discusses the case and its implications for businesses.

    Luona Hao

    internet shopping cart

    The U.S. Supreme Court heard oral arguments in the case of South Dakota v. Wayfair, Inc. et al. on Tuesday, April 17. South Dakota asked the Court to revisit Quill Corp. v. North Dakota’s physical-presence rule and uphold the constitutionality of South Dakota’s sales tax nexus law.

    In 1992, the Court ruled in Quill that the Constitution's dormant Commerce Clause prohibits the states from imposing a sales tax collection obligation on out-of-state retailers that do not have a physical presence in the state, reaffirming the physical-presence rule it established in the 1967 National Bellas Hess Inc. v. Illinois Department of Revenue decision. Both Quill and Bellas Hess involved mail-order businesses.

    Justice Kennedy’s 2015 criticism of Quill (in Direct Marketing Association v. Brohl) encouraged South Dakota to enact a law that challenges Quill. That law looks to a retailer's economic presence rather than its physical presence in the state. It provides that retailers with annual sales of more than $100,000 or 200 separate transactions in South Dakota must collect and remit South Dakota sales tax. The law also protects retailers from retroactive liability.

    Luona Hao Luona Hao, U.W. LLM/SJD candidate, is a member of the New York Bar and currently a law clerk at the Wisconsin Department of Revenue.

    At the oral argument, South Dakota argued that the physical-presence rule under Quill is causing states to "lose massive sales tax revenue," and creating an "unlevel playing field … where out-of-state remote sellers are given a price advantage." It suggested that Quill's physical-presence rule was obsolete in the digital era. Fifteen briefs were filed in support of South Dakota, including one from the United States government.

    Respondents (Wayfair Inc.,, Inc. and Newegg, Inc.) argued that Quill was correctly decided and should be upheld under stare decisis based on reliance interests of retailers, and to avoid anticipated high compliance burdens. They contended that "Congress remains the proper body" to address this issue. Twenty-three briefs have been filed in support of this position.

    Wayfair highlights a trend among states to use economic presence as the threshold standard for finding sales and use tax nexus. If the physical-presence rule of Quill is overturned, the sales and use tax nexus landscape will change significantly.

    Possible Outcomes

    A justice's questions at oral argument do not always reflect the final decision of the Court, so one cannot be sure what the ultimate decision will be. However, the concerns expressed may telegraph some possible outcomes.

    Deferring to Congressional Action. Three justices (Kagan, Breyer, and Alito) seem to lean toward leaving the issue to Congress.

    Justice Kagan suggested during the oral arguments that Congress is in a better position to strike a balance. She explained that "the [Court’s] choice is just binary … you either have the Quill rule or you don't," but “[Congress] can craft a compromise in ways that we cannot.”

    South Dakota Attorney General Marty Jackley said that Congress’s 26 years of inaction demonstrated that it is unlikely to act now, and thus urged the Court to act. However, Justice Kagan interpreted this inaction differently, saying “[I]t gives us reason to pause. … This is a very prominent issue which Congress has been aware of for a very long time and has chosen not to do something about that."

    Justice Breyer suggested that the lack of empirical data has hindered the Court from reaching an answer, and that these questions might be better settled by a hearing in Congress. Justice Breyer pointed out that the reason the Court is "more willing to overturn a constitutional case is because Congress can’t act." He noted that briefs from three Senators and Representative asserted that Congress had paused action when the Court took this case.

    Justice Alito suggested congressional action was a better option because it could address potential retroactivity and nexus threshold concerns. “[I]f Quill is overruled, what incentives do the states have to ask for any kind of congressional legislation?” he said. However, Justice Alito cautioned that South Dakota law is a “test case … devised to present the most reasonable incarnation of this scheme,” and other states and municipalities tottering on the edge of insolvency have a strong incentive to “grab everything they possibly can.” This means that Justice Alito might be willing to join a narrow ruling upholding South Dakota's law.

    Overturning Quill. Based on oral argument and history, Justices Kennedy, Gorsuch, Ginsburg, and Thomas are the four justices most likely to uphold the stated law and overturn Quill.

    Justice Kennedy has directly criticized Quill in the 2015 DMA decision. “A case questionable even when decided, Quill now harms states to a degree far greater than could have been anticipated earlier.”

    Justice Gorsuch’s opinions in the oral argument were, as anticipated, also in line with his known skepticism about Quill. He suggested that upholding Quill would be favoring internet retailers over brick-and-mortar retailers. He also voiced his concern that if Quill is upheld, internet retailers will have to deal with Colorado-type statutes requiring internet retailers to report sales to customers, and that such reporting statutes may be even more burdensome than just requiring collection and remittance.

    Justice Ginsburg questioned why the Supreme Court should not take its responsibility to overturn its own doctrine created in Quill. “Quill, right or wrong, was this Court's decision. And if time has, and changing conditions have, rendered it obsolete, why should the Court … say we'll let Congress fix up what turns out to be our obsolete precedent?” Ginsberg suggested that subjecting everyone that sells in-state with the same sales tax collection obligation would be “equalizing rather than discriminating." If Quill is upheld, then “the state has the burden of going after consumers,” which is less efficient than going after the seller.

    Justice Thomas remained silent during the oral argument, but has criticized constitutional basis of the dormant Commerce Clause in his 2015 dissenting opinion in Comptroller of the Treasury of Maryland v. Wynne, which could mean he is more likely to vote to overturn Quill.

    Upholding Quill. Justice Sotomayor was the most vocal justice in favor of upholding Quill. She noted overturning Quill may “create a massive amount of lawsuits” and bring potential retroactivity concerns in many states who have already made this collection retroactive. She also noted the burdens on small business to implement sales tax programs.

    It is not yet clear what the position of Chief Justice Roberts would be. He questioned whether there would be a “constitutional minimum” regarding whether out-of-state business would be protected from the obligation and burdens of sales tax collection. South Dakota responded that the substantial nexus test in the 1977 Complete Auto Transit, Inc. v. Brady and balancing test in the 1979 Pike v. Bruce Church, Inc. decisions would provide the protection. Chief Justice Roberts seems to read the voluntary collection by big e-commerce companies as signs that the economic impact of sales tax noncollection by remote sellers is getting better, and therefore the Court may not need to act.

    Given the divided opinions of the justices, as well as the uncertainty of the positions of Chief Justice Roberts and Justice Breyer, the outcome of Wayfair remains unpredictable.

    Implications for Business

    While the outcome of Wayfair cannot be certain until the final decision comes out, businesses should begin to consider compliance issues in anticipation of future sales tax collection requirements.

    Regardless of whether Quill stands or is overturned, retailers may want to consider:

    • Whether current internal systems and processes reflect recent changes in state sales tax laws and regulations, such as click-through nexus, economic nexus, or notification and information reporting requirements.

    • In states adopting Colorado-type notification requirements, whether voluntary registration or compliance with the notice requirements is more appropriate.

    • Whether the increased compliance burdens change the decision to enter a market.

    • If Quill is modified or overturned:

      • Whether state statutes clearly impose sales and use tax under a new nexus standard, or require amendment.
      • How much retroactive liability, if any, may exist for consumers and retailers.
      • Whether the required customer data are available to determine how to source sales if sales and use tax obligations are imposed.
      • Whether appropriate systems and processes are in place to collect applicable sales taxes.


    The views and opinions expressed in this article are those of the author's and do not reflect the position of the Wisconsin Department of Revenue.

    This article was originally published on the State Bar of Wisconsin’s Taxation Law Blog. Visit the State Bar sections or the Taxation Law Section web pages to learn more about the benefits of section membership.

Join the conversation! Log in to comment.

News & Pubs Search

Format: MM/DD/YYYY