Tax News Update    Email this document    Print this document  

June 21, 2018

US Supreme Court overturns Quill, eliminates physical presence nexus standard for sales and use tax collection

On June 21, 2018, the US Supreme Court (Court) issued its much anticipated ruling in South Dakota v. Wayfair.1 In a 5-4 ruling, a majority of the Court voted to overturn both Quill 2 and National Bellas Hess,3 finding that the physical presence nexus standard articulated in the two earlier opinions "is unsound and incorrect." As a result of the Court's decision, states may now begin requiring all remote sellers to register, collect and remit sales and use taxes on transactions with in-state customers regardless of the seller's physical presence, provided that they do so in a manner that does not otherwise violate the Commerce Clause by discriminating against or imposing undue burdens on interstate commerce.

The majority opinion: Quill was an unsound and incorrect interpretation of the Commerce Clause

Justice Anthony Kennedy, writing for a majority including Justices Thomas, Ginsburg, Alito and Gorsuch, explained that the Court's precedent interprets the Commerce Clause as prohibiting states from regulating interstate commerce in a manner that is discriminatory or imposes an undue burden. As applied to state taxes, the Court cited the four-factor Complete Auto Transit 4 test, which held that a state tax will be sustained under the Commerce Clause if the tax: 1) applies to an activity with substantial nexus with the taxing state, 2) is fairly apportioned, 3) does not discriminate against interstate commerce, and 4) is fairly related to the services provided by the state.

Through its prior rulings in National Bellas Hess and Quill, the Court had held that, at least with respect to sales tax, a seller that lacked any direct or attributed physical presence in a state could not be considered to have a substantial nexus with that state under the Commerce Clause. In a recent decision,5 however, Justice Kennedy, who authored the opinion in Wayfair but also voted with the majority in Quill, noted that the physical presence standard constituted a "serious, continuing injustice faced by" the states. In Wayfair, with the physical presence nexus standard squarely at issue, Justice Kennedy explained that the doctrine had become "further removed from economic reality," resulting in significant state revenue losses, and "as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause."

The majority also noted that, while not identical, the nexus standards under the Due Process and Commerce Clauses have significant parallels. This observation is noteworthy, given that the Quill majority drew a sharp distinction between the respective standards, with the Commerce Clause imposing a higher burden on the states. Given the ruling in Wayfair, that distinction becomes less clear, if not, completely non-existent, raising the possibility that, for sales and use tax collection purposes, the standard may now merely be "purposeful availment" or "minimum contacts," as asserted in previous Commerce Clause cases, including in the original 1992 Quill opinion itself.

Continuing its analysis, the majority explained that: 1) the physical presence standard "is not a necessary interpretation of the requirement that a state tax must be 'applied to an activity with a substantial nexus with the taxing State;'" 2) Quill does not resolve market distortion but creates it; and 3) Quill "imposes the sort of arbitrary, formalistic distinction that the Court's modern Commerce Clause precedents disavow." The Court illustrated these largely economic-based concerns by noting that the administrative costs of compliance were largely unrelated to a taxpayer's physical presence. The Court also expressed that Quill had effectively become 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 consumers — something that has become easier and more prevalent as technology has advanced." Instead, the Court advocated for a more "sensitive, case-by-case analysis of purposes and effects" over the physical presence standard, which is "artificial in its entirety."

The Court then noted the various state legislative attempts to expand physical presence and compliance burdens — such as "cookie" nexus, expanded affiliated and click-through provisions, and notice and reporting requirements — had eliminated physical presence as a clear or easily applicable standard, thereby undercutting any arguments based on principles of stare decisis. As such, the majority noted, it was incumbent on the Court to address the "false constitutional premise" of its own creation, and that it would not be appropriate to ask Congress to change what had become "the constitutional default rule."

Ultimately, the Court chose to focus primarily on the practical economic effect and the continued viability of the physical presence standard given the Internet's "prevalence and power," which has "changed the dynamics of the national economy." The Court also dismissed concerns that compliance costs would harm the market, noting that, eventually, software would be available at a reasonable cost to lessen the burden on small sellers. To this end, the Court noted that the protections in South Dakota's law — including sales threshold limitations, limits on retroactivity, and Streamlined Sales Tax (SST) membership — were sufficient to limit the burdens on interstate commerce. Nevertheless, the Court did not opine directly on the constitutionality of the law, choosing instead to vacate and remand the case back to South Dakota, where any other Commerce Clause questions might be raised.

Justices Thomas and Gorsuch agree

While joining in Justice Kennedy's opinion, Justice Thomas noted in a concurring opinion that, although he joined with Justice Kennedy in Justice Scalia's concurring opinion in Quill on stare decisis grounds, looking back over the past quarter century had convinced him that "Bellas Hess and Quill 'can no longer be rationally justified," nor could the Court's entire negative (dormant) Commerce Clause jurisprudence.

Justice Gorsuch, who also joined the majority but still wrote a separate concurrence, noted that Bellas Hess and Quill amounted to discrimination between in-state and out-of-state businesses, but questioned whether an Article III court could invalidate a state law that offended no Congressional statute. Justice Gorsuch also articulated a view very similar to Justice Thomas' view (and that of Justice Scalia before him) that the Court's entire negative Commerce Clause jurisprudence was suspect.

The minority favors Congressional action

In a dissent joined by Justices Breyer, Sotomayor, and Kagan, Chief Justice Roberts explained that, while he agreed that Bellas Hess was wrongly decided, it was incumbent on Congress to exercise its Commerce Clause authority to change the standard, and that stare decisis, which was so important in deciding Quill, "should be an even greater impediment to overruling precedent," especially in light of the Quill Court's specific call for Congress to act.


The most pressing issue for multistate taxpayers is whether the states will attempt to assert liability for uncollected taxes on a retroactive basis. While most states have indicated that they will not do so, and a few states have enacted legislation specifically prohibiting retroactive assessments, most states do have laws on the books — some dating back to the 1970s — that apply an economic/minimum contacts nexus standard and could conceivably be enforced at will. Many of these laws, often called "anti-Bellas Hess" statutes, though never repealed, were effectively pre-empted by the Court's decision in Quill. Taxpayers should be wary that states will resurrect those statutes and begin enforcing sales tax collection responsibility conceivably as far back as the very first sale a remote seller may have made into the jurisdiction (considering the Court's very clear ruling that Quill and Bellas Hess before it were both "unsound and incorrect" even when decided.)

Regardless, remote sellers that have made sales into a state and not collected sales tax should assess their particular situations immediately and consider approaching the states under their voluntary disclosure or amnesty programs. We anticipate many states will make announcements in the next few days on what they intend to do in light of this significant state sales tax ruling that likely has far-reaching implications.

Regarding compliance, multistate businesses that already were collecting in multiple states can expect to see their compliance costs increase, whereas businesses that have not been collecting and do not have a comprehensive sales and use tax compliance system will be under extreme pressure to rapidly assess and quickly implement a feasible and perhaps costly compliance solution. While no state has offered any guarantee, some state tax officials have already publicly stated that they will be "reasonable" in their approaches and hopefully, will allow sufficient time for such companies to prepare to register, collect and remit the appropriate sales taxes.

Regarding SST and the Certified Service Provider (CSP) program, there may be some early stress on the system as the universe of multistate sellers with a collection obligation significantly expands and this program responds to the increased demand for its services.

Finally, but no less importantly, all taxpayers must immediately consider the impact of this decision on their operations; specifically budgeting for increased compliance costs, leveraging additional internal or external resources, and considering potential ASC 450 implications and other reporting obligations. For companies that self-assess use tax on purchases or claim exemptions, it will be important to closely evaluate how increased collection by vendors will affect tax payments, while marketplace providers and small sellers will need to determine who will be considered the "seller of record" responsible for tax collection and remission under various state interpretations.


Contact Information
For additional information concerning this Alert, please contact:
State and Local Taxation Group
Karl Nicolas(202) 327-6585;
Steve Wlodychak(202) 327-6988;
Joe Huddleston(202) 327-7785;
Mike Wasser(617) 585-1872;
Christine Lapps (615) 252-8247;
Michael Woznyk(212) 773-3008;


1 South Dakota V. Wayfair, Inc., Dkt. No. 17-494 (U.S. S. Ct. June 21, 2018).

2 Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

3 National Bellas Hess, Inc. v. Illinois Dept. of Rev., 386 U.S. 753 (1967).

4 Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977).

5 Direct Marketing Assn. v. Brohl, 135 S.Ct. 1124 (2015).