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Quill Corp. v. North Dakota will be in the spotlight again as the Court considers physical nexus versus economic nexus.

Tax strategies

U.S. Supreme Court Will Revisit Landmark Sales Tax Nexus Decision

  • Muthu Periakaruppan
  • Steven Claflin
  • 1/19/2018

Update: 6/22/18
On June 21, 2018, in the Wayfair case the Supreme Court overturned Quill Corp. v. North Dakota. This could potentially open the door for all states to collect sales tax even if a business does not have a physical presence in that state. Read our updated article to learn more.

The U.S. Supreme Court has agreed to review the South Dakota Supreme Court’s opinion in South Dakota v. Wayfair, Inc., et al (Docket No. 17-459). This means that the Court will re-evaluate the physical presence nexus standard that it created for sales tax purposes in its 1992 opinion in Quill Corp v. North Dakota, which could have dramatic implications for states and taxpayers.

Depending on the outcome of the Wayfair case, businesses that sell into a state but who do not have a physical presence in a state (remote sellers) may be required to collect and remit the state’s sales tax.

The Quill physical presence standard

Quill Corp. v. North Dakota is a 1992 Supreme Court decision which held that North Dakota could not require an out-of-state mail-order company to collect sales tax on items delivered into North Dakota because the company did not have a physical presence there.

In that case, the Court stated that such a requirement would be a violation of the commerce clause unless the seller had “substantial nexus” in the state, which it held requires a physical presence for sales tax purposes. This physical presence standard remains the current minimum threshold for states to impose a sales tax collection obligation on a seller.

Economic presence: the new standard

In his 2015 concurrence in the Direct Marketing Association v. Brohl case, Justice Anthony Kennedy suggested that Quill’s physical presence nexus standard for sales tax should be reconsidered. This prompted a large number of states to enact economic nexus standards for sales taxes in order to bring a challenge to the Quill decision. States passing laws included Alabama, Indiana, Maine, Massachusetts, Mississippi, North Dakota, Ohio, Rhode Island, Tennessee, Vermont, and Wyoming.

In 2016, South Dakota signed its own economic nexus bill (S.B. 106) into law. This legislation requires sellers that do not have a physical presence in South Dakota to register and collect sales tax based on an economic nexus standard. The requirement for a remote seller to register is triggered if the seller makes at least 200 separate sales, or a total of $100,000 in sales, to South Dakota purchasers.

In response to this law, retailers filed suit alleging that it was unconstitutional under Quill. South Dakota’s Sixth Judicial Circuit ruled in favor of the plaintiffs, stating that the Court was bound by Quill. The South Dakota Supreme Court then affirmed the ruling on September 14, 2017, allowing South Dakota to appeal to the U.S. Supreme Court.

What this means for remote sellers

Since 1992, remote sellers have relied on Quill to avoid the obligation of registering and collecting a state’s tax. If Quill is overturned by the Wayfair case, then a remote seller with economic nexus in a state would need to:

  1. Register with the state to collect sales tax
  2. Determine the taxability of the various items it may sell into the state
  3. Determine the appropriate state and local sales tax rate to collect based on location
  4. File returns to report these sales
  5. Potentially defend itself under audit

It’s possible that the Supreme Court will not completely overturn Quill. While it could remove the physical presence requirement, it could also impose other standards to prevent an undue burden on commerce. For example, it could require economic nexus laws to have a small seller exception, similar to the one in proposed federal legislation (the Marketplace Fairness Act), where companies that do not meet a certain in-state revenue threshold could not be required to collect a state’s tax, absent a physical presence in that state.

It’s also possible that the Supreme Court could affirm Quill, although the Court could have effectively accomplished the same thing just by declining to hear the Wayfair case.

It is possible (but not certain) that the Court will hear the case during its current term. If it does, it would issue its opinion by the end of June 2018.

How we can help

CLA’s state and local tax professionals can help you by performing a sales tax nexus study to determine where you should be registered for sales tax based on current law. We review your current business and processes to determine what activities are taking place across the country to confirm that filings are being made everywhere they are required. If you are required to register with a state based on current law or the outcome of this Supreme Court decision, we offer a complete sales tax outsourcing solution to manage your sales tax compliance obligations from start to finish.