Buchanan Law Group

BLG Law Notes

Supreme Court Decision Sheds the Decades-Old Physical Presence Standard

In a seminal decision handed down on June 21, 2018, the United States Supreme Court discarded twenty-five years of sales and use tax jurisprudence by soundly rejecting the physical presence standard embodied by the Quill v. North Dakota[1] decision - a decision the Court asserted was “unsound and incorrect”. The Quill opinion had established that an out-of-state retailer must have some level of physical presence in a state (e.g., through property, activities or agents) before a state could exercise jurisdiction over the retailer and force it to pay sales tax to the state. In rejecting Quill, the Court held that physical presence is not necessary to meet the “substantial nexus” requirement set forth in the Complete Auto Transit[2] decision.

The case (coincidentally involving assertions of taxing authority by Quill’s sister state, South Dakota) – South Dakota v. Wayfair, Inc.[3] – involved three major internet retailers challenging South Dakota’s economic nexus law which imposes sales tax collection and remittance requirements on out-of-state sellers delivering more than $100,000 of goods or services into South Dakota or engaging in 200 or more separate transactions for the delivery of goods or services into South Dakota. In assessing the constitutionality of South Dakota’s economic nexus law, the Court found that Quill was flawed on its own terms, and that the “physical presence” rule is not a necessary interpretation of Complete Auto Transport’s nexus requirement.

Further, the Court stated that Quill creates, rather than resolves, market distortions; in effect, calling the Quill decision a judicially created tax shelter for businesses that limit their physical presence in a State but sell their goods and services to the State’s consumers. And lastly, the Court described Quill as imposing an arbitrary distinction that the Commerce Clause disavows, treating economically identical actors differently, for arbitrary reasons (e.g., a business that maintains a few items of inventory in a small warehouse in a State is required to collect and remit a tax on all of its sales in the State, while a seller with a pervasive internet presence cannot be subject to the same tax for the sales of the same items.   

For the above reasons, the Court concluded the physical presence test of Quill was unsound and incorrect. In the absence of Quill and Bellas Hess[4], the Court went on to say, the first prong of the Complete Auto test simply asks whether the tax applies to an activity with a substantial nexus with the taxing State. Such nexus exists, Court suggested, when the taxpayer avails itself of the substantial privilege of carrying on business in the jurisdiction, concluding that nexus was clearly sufficient based on the economic and virtual contacts Wayfair had with the State of South Dakota.

Businesses should expect to see a rapid expansion in the number of states asserting broader nexus standards, and thus more state sales tax obligations, in light of the Wayfair standard. Should you have any questions concerning this case, or any other tax issue facing businesses, please do not hesitate to give us a call.


[1] Quill Corp. v. North Dakota By and Through Heitkamp, (1992, U.S.) 504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed. 2d 91.
[2] Complete Auto Transit Inc. v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed. 2d 326.
[3] U.S. S.Ct. Dkt. No. 17-494, June 21, 2018.
[4] National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753, 87 S.Ct. 1389, 18 L.Ed. 2d 505 (1967).

Nathan Melen