United States Supreme Court Overturns Quill Physical Presence Standard – Online Retailers Beware

    On June 21, 2018, the United States Supreme Court issued its decision in South Dakota v. Wayfair, Inc., 585 U.S. __ (2018). In a 5-4 decision, the Court found in favor of the State of South Dakota and overturned their prior holdings in Quill Corp.  v. North Dakota, 504 U.S. 298 (1992) and National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967), which required an out-of-state seller to have a “physical presence” to establish nexus with the taxing jurisdiction.

    In an opinion written by Justice Anthony Kennedy in which Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito and Neil Gorsuch joined, the Court moved towards a “virtual presence” standard for out-of-state sellers, as opposed to a physical presence standard, a change from the last 26 years. 


    Prior to this ruling, a state could not require an out-of-state seller to collect and remit sales and use tax if the seller did not have a physical connection with the state. The Quill standard required a seller to have activities such as employees working in a state, storing inventory, maintaining an office, attending meetings, and delivering product in company vehicles, before the seller could be burdened with a state registration, collection and remittance obligation.

    South Dakota’s challenge

    In 2016, South Dakota enacted economic nexus legislation that required out-of-state sellers to collect and remit sales tax if the seller 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, on an annual basis.  

    Three major online retailers, Wayfair, Inc., Overstock.com, Inc. and Newegg, Inc., challenged the legislation on the basis that none of them had employees or real property in South Dakota, and therefore no physical presence. Each of these retailers regularly sell a wide variety of products and ship its goods directly to purchasers in South Dakota, thus easily meeting the minimum sales or transaction thresholds that were established by the State legislation.

    New standard

    Wayfair, which upheld South Dakota’s economic nexus legislation, signals a new era by overturning the court’s prior holdings and physical presence nexus standard, referred to these prior rules as “unsound and incorrect.” The decision attempts to reflect the modern economy, in which e-commerce is growing at a faster pace than traditional brick-and-mortar retail, and attempts to level the playing field between remote sellers and those with physical presence in a state. 

    Remote sellers, and online retailers now face significant additional compliance requirements in a significant number of states. This is especially true given that many states have enacted legislation like South Dakota’s in anticipation of the Wayfair ruling.  

    Wayfair recognizes the challenges to compliance faced by small merchants, but deemed the South Dakota law to afford small merchants a “reasonable degree of protection” by including a minimum sales or transaction threshold before requiring sellers to collect and remit tax. In a dissent written by Chief Justice John Roberts, it is argued that imposing a tax collection requirement on retailers is too burdensome, particularly for small businesses, considering there are over 10,000 taxing jurisdictions with “different tax rates, different rules governing tax-exempt goods and services, different product category definitions, and differing standards for determining whether an out-of-state seller has a substantial presence in the jurisdiction.”

    Subject matter expertise

    • Patrick Duffany headshot
      Contact Patrick Patrick+Duffany Patrick.Duffany@CohnReznick.com
      Patrick Duffany

      CPA, JD, Managing Partner - Tax

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