Supreme Court Overturns Decades-Old Precedent; Allows States To Tax Retailers Doing Business In States Without Physical Presence

On June 21, 2018, in South Dakota v. Wayfair,[1] the U.S. Supreme Court overruled the long standing “physical presence test” established under Quill Corp. v. North Dakota[2] (“Quill”) to determine whether there is a sufficient nexus for a state to require an out-of-state retailer to collect and remit sales tax for conducting business within its borders. In doing so, the Court has paved the way for states to impose sales taxes on out-of-state online retailers, which could allow the states to claim an estimated $8 to $33 billion in additional revenue per year.

Under the physical presence test, a vendor was not required to collect and remit sales and use tax unless it had sufficient contacts with the jurisdiction, such as employees, property, or other physical presence. 

Under South Dakota S.B. 106, an out-of-state retailer must collect and remit sales tax to South Dakota if the seller makes over $100,000 in gross revenue from the sales of tangible personal property or services delivered in South Dakota or completes 200 or more separate transactions for delivery in the state.[3] The legislation ruled out retroactive application and provided a stay until its constitutionality was established.

South Dakota sought a declaratory judgment that the law was valid against certain retailers. Wayfair, Overstock.com, and Newegg, Inc. responded by challenging the law’s constitutionality under the Dormant Commerce Clause.[4]  The state conceded that the law was unconstitutional under Quill and National Bellas Hess, Inc. v. Department of Revenue of State of Illinois, 386 U.S. 753 (1967), and lost on summary judgment.  The South Dakota Supreme Court affirmed the lower court’s holding that the statute was unconstitutional, and the U.S. Supreme Court granted South Dakota’s petition for cert.[5]

In Wayfair, the Court overruled Quill and Bella Hess, noting that the Quill decision “is flawed on its own terms,”[6] in part because it created a “online sales loophole” that gave unfair advantages to out-of-state retailers at the expense of in-state rivals.[7]

The Court held that physical presence was not a requirement for a business to have a sufficient nexus for tax purposes and that a seller availing itself of the privilege of conducting business in a jurisdiction met the nexus requirement.

The Court’s ruling will have sweeping implications for companies engaged in sales across state lines.  Several states have “kill-Quill” laws similar to S.B. 106 and will now pursue those vendors that meet the legislative thresholds. The burden of these additional collection and reporting obligations will have the greatest impact on small to mid-size businesses because many e-commerce giants already collect and remit state sales taxes. While South Dakota S.B. 106 expressly disclaims any retroactive application, other states could test this limit by passing legislation with a broader reach and attempting to collect past due taxes. 

Sellers should conduct careful due diligence into the locations in which they are selling goods and services and consult with counsel to avoid or address state tax enforcement efforts.


[1] 585 U.S.__, No. 17-494 (June 21, 2018).

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

[3] S.B. 106, § 1, 2016 Leg., 91st Sess. (S.D. 2016).

[4] Wayfair, 585 U.S. ___, at 3.

[5] Id. at 4.

[6] Id. at 10.

[7] Id. at 10–16.