The Wayfair Case, Quill, and Sales and Use Tax Nexus History

On April 17, 2018 the United States Supreme Court heard arguments in the case of South Dakota v. Wayfair Inc., challenging the long-standing law regarding when a state may impose its sales and use tax collection requirements on remote sellers.  The Court is expected to issue its opinion within the next few weeks.

At issue is the long-standing physical presence nexus requirement that is the result of a previous U.S. Supreme Court case, National Bellas Hess v. Illinois, in 1967.  The United States Supreme Court said that state laws requiring remote sellers to collect sales or use tax must meet both the Due Process Clause and the Commerce Clause requirements of the U.S. Constitution.  In National, the Court said that a remote seller must have a physical presence in the state that is more than the slight physical presence of doing business via common carrier and the U.S. Postal Service to meet both of these requirements.

In 1992, the state of North Dakota decided to challenge the law, which resulted in another U.S. Supreme Court case, Quill v. North Dakota.  In Quill, the Court ruled that a physical presence was no longer a necessity for the Due Process Clause.  However, for Commerce Clause purposes, a physical presence was still required.  The Court still had concerns about the effects of collection requirements on interstate commerce that it expressed in the National opinion:

“And if the power of Illinois to impose use tax burdens upon National were upheld, the resulting impediments upon the free conduct of its interstate business would be neither imaginary or remote.  For if Illinois can impose such burdens, so can every other State, and so, indeed can every municipality, every school district, and every other political subdivision throughout the Nation with power to impose sales and use taxes.  The many variations in rates of tax, in allowable exemptions, and in administrative and record- keeping requirements could entangle National’s inter-state business in a virtual welter of complicated obligations to local jurisdictions with no legitimate claim to impose a fair share of the cost of the local government.”

In 1992, there were an estimated 6,000 state and local taxing jurisdictions.  Today, estimates have grown to between 10,000 and 16,000.  Many of these jurisdictions have their own rules and regulations, along with their own remittance and filing requirements.

In addition to upholding its previous ruling regarding the Commerce Clause, the Court in Quill said something else that was very important in shaping the future resolution of the issue.  The Court said that Congress was free to disagree with the Court’s opinion and enact legislation mandating remote sellers to collect another state’s sales and use tax and that Congress may be better equipped to resolve the matter.

Ever since the Supreme Court’s ruling in 1992, states have been searching for a way to have Congress pass legislation requiring remote sellers to collect the tax.  Since the 1970s, every session of Congress has introduced a bill to address this issue.  In 2013, the Marketplace Fairness Act passed in the U.S. Senate but stalled in the U.S. House of Representatives, because certain House members were concerned about allowing states to impact activities beyond their borders.  House members at the time cited the Congressional concept of “no regulation without representation,” believing that a taxing state should not be able to impose requirements of conduct upon a remote seller that lacks physical presence and rights to legislative representation in the taxing state.

States have also taken action on their own regarding Quill.  Such action includes establishing the Streamlined Sales Tax Agreement, enacting click-through nexus laws and non-nexus use tax reporting requirements.

In 2010, the state of Colorado passed a law requiring remote sellers that do not have a physical presence in Colorado to comply with various reporting requirements regarding sales to Colorado residents.  Many remote sellers found the reporting requirements so onerous that a number of vendors chose to register and collect the state’s tax rather than try to comply with all of the components of the reporting law.  After years of legal challenges, in February 2016, the U.S. Court of Appeals for the 10^th Circuit ruled that Colorado’s reporting requirements were constitutional.  The U.S. Supreme Court turned down a request to hear the case.  As such, the Court of Appeals’ opinion holds, and the Colorado reporting requirement is law, providing states with perhaps their best tool with which to compel remote sellers to register and collect sales or use tax.  States such as Pennsylvania and Washington have enacted similar reporting requirements in the past year.

Partly based upon opinions issued in the various Colorado reporting court cases, states became aggressive in passing laws and issuing regulations challenging Quill’s physical presence requirement.  One of the first states was South Dakota.  The South Dakota law used an economic standard for nexus instead of physical presence.  Under the new South Dakota law, a remote seller has nexus with the state if it has an annual sales threshold of $100,000 or 200 or more separate transactions in South Dakota.  South Dakota then proceeded to file lawsuits against a number of remote sellers, including Wayfair, to register and collect the state’s use tax.  Enforcement of South Dakota’s law has been put on hold, pending the outcome of the Wayfair case.  The South Dakota courts struck down the law, since it violated Quill’s physical presence standard.  South Dakota then requested that the U.S. Supreme Court hear the case, which it did on January 12, 2018.

Proponents of the South Dakota law claim that their new nexus standards are more appropriate in a 21^st century economy, and that Quill improperly provides a tax haven and unfair competitive advantage for remote sellers over in-state brick-and-mortar stores.  States claim that Quill deprives state and local jurisdictions of much-needed tax revenue.

Defenders of Quill claim the law still works.  Supporters point out that many of the largest remote sellers (such as Amazon) are already registered in most states, since those remote sellers shifted their business model to focus on customer service, requiring a greater physical presence in multiple states.  This physical presence requires complying with sales and use tax registration and collection requirements.  Quill defenders also agree with the Court’s previous ruling, stating that Congress is the best institution to settle the dispute.  Quill proponents also question the logic of overturning a law to shift an unfair burden from one group to another, claiming that even small remote sellers with no physical presence would have collection responsibilities in every sales and use tax jurisdiction in the United States.  In-state brick-and-mortar retailers would only have to charge one tax rate and familiarize themselves with one state’s set of rules and procedures, while remote sellers would have to be concerned with potentially 10,000 to 16,000 jurisdictions.  

The dynamics of the case are interesting:  Justices Anthony Kennedy and Clarence Thomas were on the court when Quill was decided 26 years ago and have made comments that appear to convey that they believe Quill should be overturned; however, both justices were relatively quiet during oral arguments in April.  Conversely, Justices Elena Kagan, Sonia Sotomayor and Stephen Breyer asked many questions to both sides. Justices Kagan and Sotomayor seemed concerned about the ensuing chaos that could occur if the Court were to simply overturn Quill. 

Prior to oral arguments, the conventional wisdom among the experts stated that the Court would not have taken the case unless a number of the justices intended to overturn Quill, since the Court has turned down numerous opportunities to take up the case in the past.  However, after oral arguments, the experts seemed to tone down their predictions of Quill’s demise.

What the Court will decide is anyone’s guess. Regardless, we will know their decision shortly.