United States: Supreme Court Upends Tax Rules For Remote Sellers

On June 21, 2018, the U.S. Supreme Court rendered a decision with broad implications for merchants selling in multiple states. South Dakota v. Wayfair, 585 U.S. ___ (2018). In Wayfair, the Court rejected the physical presence standard for determining when a remote seller must collect state and local sales (use) tax. This historic change in tax law subjects internet, TV, radio and catalog retailers to collection responsibility for thousands of different state and local sales/use taxes across the country. This decision not only impacts large internet retailers, but also tens of thousands of small to medium retailers, which will be forced to comply with the demands from state and local governments across the country. Small- to midsize businesses now will be required to determine which goods and services are subject to sales tax in particular states as well as determine when the seller has to collect tax.

The Court explicitly rejected the requirement that a remote seller must have a physical presence in a state before that state or its localities could require sales tax collection. A majority of the Court swept aside the rules that guided this area of tax compliance for more than 50 years. While the Court’s decision broadly expands the number of sellers that must collect tax in states where customers are located, the decision contemplates that additional litigation is needed to evaluate the constitutionality of the burdens being placed on interstate commerce.


The Commerce Clause of the United States Constitution grants Congress the power to regulate commerce. The U.S. Supreme Court has long construed the “dormant” Commerce Clause as limiting the power of the states to tax transactions occurring in interstate commerce even in the absence of legislation.

In 1992, the Supreme Court’s decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), concluded that the Due Process clause did not prevent the states from requiring remote sellers to collect the sales tax but affirmed the Commerce Clause holding of National Bellas Hess. The rule announced under Quill thus continued to limit the ability of the states to require collection of sales tax when the sellers lacked physical presence in the taxing states.

For many years, the states have argued that the rise of internet commerce had fundamentally changed how the United States economy operates. The states sought to limit the effect of the Quill decision by statutes to expand the concept of physical presence. Several states enacted statutes that provided that a physical presence existed when affiliates conducted business in the state, or when in-state retailers benefited from the use of non-affiliated websites operated by residents (i.e., “click-through nexus”), or when retailers used apps, cookies or in-state content distribution networks to reach customers.

In 2016, the state of South Dakota passed legislation that eliminated the physical presence standard for “substantial nexus” established in Quill, and replaced it with an economic presence standard that would require sellers to collect tax once the seller, on an annual basis, has either 200 separate sales or $100,000 in sales into South Dakota. The statute did not permit retroactive application while Quill still applied.

Wayfair is a 5-4 decision. Joining Justice Kennedy in the majority are Justices Thomas, Ginsburg, Alito and Gorsuch. Chief Justice Roberts filed a dissent in which Justices Breyer, Sotomayor and Kagan joined.

The Majority Opinion leaves no doubt that Quill and the physical presence requirement are dead:

  • Quill was said to be “unsound and incorrect.”
  • The physical presence requirement increasingly has become “further removed from economic reality” and causes large losses in state revenues.
  • The physical presence requirement creates an arbitrary advantage for remote sellers and discourages in-state development by discouraging in-state presence.
  • The Majority does not think that it is right that some minor in-state presence triggers the collection requirement when “pervasive internet presence” does not.
  • The Majority concludes that modern e-commerce does not align well with the use of the physical presence standard. The rule should not ignore “substantial virtual connections” with the state.
  • The physical presence standard is “an extraordinary imposition … on state authority.”
  • Stare decisis is not enough to continue to apply Quill and the “internet revolution” emphasizes the error of Quill.
  • Reliance interests are not enough to permit “tax avoidance” and small businesses and startups can rely on other aspects of the Commerce Clause for protection, which other protections are described only vaguely.
  • Because the particular South Dakota law limits its application to sellers with a “significant quantity of business with the taxing State,” and the particular taxpayers before the Court are large retailers with “extensive virtual presence” in the states, the Commerce Clause does not prevent the states from requiring collection.


Chief Justice Roberts agreed that Quill was wrongly decided but would have not overturned Quill under principles of stare decisis. The Dissent also focused on the role of Congress to set the rules in the area.

Our observations

  • The Majority decision is a broad affirmation of the states’ authority to require collection of use tax by remote sellers.
  • The Court did not deny that the use tax collection system created burdens on sellers, especially smaller sellers, but relies on South Dakota’s annual thresholds - 200 sales or $100,000 in sales - as protecting smaller sellers.
  • The Majority Opinion does not focus on the burdens on remote sellers and projects no obligation on the states to reduce those burdens.
  • The Court does not address the assertions made at oral argument that a single sale into the state may be sufficient to create nexus.
  • The Court does not meaningfully address the retroactivity issue for other states, which unlike South Dakota, have not committed to apply the Wayfair decision prospectively only.

Companies have little time to react as many states have already passed laws requiring tax collection by out of state sellers. These companies will be forced to get into immediate compliance, run the risk of audit and penalties from multiple states, or forgo selling into other states.

We will be monitoring the states’ responses to Wayfair and potential Congressional action to regulate interstate commerce to assist clients in complying with tax responsibilities going forward.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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