The U.S. Supreme Court, in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), determined that a business must have a “physical presence” to create “substantial nexus” and thus be subject to the collection and remittance of state sales tax. The Quill opinion (which relied on National Bellas Hess v. Illinois, 386 U.S. 753 (1967)) suggests that the United States Congress should decide the substantial nexus issue. Now a new case involving nexus and state and use taxes, South Dakota v. Wayfair, Inc., has made its way to the Supreme Court, and it’s uncertain if the Court will respond in a similar fashion as with Quill or go in a different direction.


As e-commerce proliferated and residents failed to pay use tax on their purchases, states faced significant declines in sales tax revenue that continue to persist. In 2015, for example, there was an estimated $26 billion loss in sales tax revenue. Over the years, states reacted with new legislation for online sales tax, with five prevailing nexus themes:

  • Click-through, which results when in-state website owners receive a commission to provide their online visitors a web-link referral to another online retailer, for example, New York’s 2008 Amazon Tax Law;
  • Affiliate, where large retailers are attributed nexus from a related in-state company (determined via ownership and control level), for example, Arkansas’s 2011 Ark. Code Ann. §26-52-117(b)(1)-(5);
  • Economic, which involves a dollar or number of sales transactions threshold, for example, Wyoming’s 2017 H.B. 119;
  • Cookie, where out-of-state sellers satisfy state economic nexus and the internet activity creates physical presence contacts via software and “cookies” as well as app purchases, for example, Massachusetts’s October 2017 regulation (formerly Directive 17-1); and
  • Marketplace provider, which facilitates (regardless of compensation/commission) a retail sale via listing or advertising and collects and transmits payment to a retailer, for example, Minnesota’s H.F. 1, which applies to third-party sellers such as Amazon’s FBA (Fulfillment by Amazon) program.

  • With these state nexus standards, internet retailers are subject to use tax notice and information reporting and/or sales tax collection and remittance. Some states that require notice and information reporting, such as Pennsylvania, allow the alternative to collect and remit the sales tax in lieu of the required notice and information reporting.


    In 2010, Colorado legislated that internet retailers are required to notify in-state customers of the state’s use tax requirements and to report tax-related information to the state (but didn’t require collection and remittance of sales tax) for in-state purchase transactions. Direct Marketing Association (DMA) filed suit in federal District Court, which determined the law was unconstitutional because in-state sellers weren’t subject to the same burden of providing notice and reporting information. The related 2015 federal appellate decision and 2016 request for writ at the U.S. Supreme Court supported Colorado’s notice and reporting requirements (Direct Marketing Association v. Brohl, U.S. S. Ct. (10th Cir.), 814 F.3d 1129 (2016) petition for cert. denied, U.S. S. Ct., Dkt. Nos. 16-267, 16-458, 12/12/2016). The determination was that the Commerce Clause wasn’t violated because the requirement didn’t discriminate against or unduly burden interstate commerce, and Quill wasn’t controlling since notice and reporting are a tax. Justice Anthony Kennedy’s concurring opinion suggests the need to reexamine physical presence nexus (Bellas Hess and Quill) given technology changes.

    In contrast, South Dakota’s “economic” nexus laws have met resistance because the state’s 2016 legislation (S.B. 106) requires collection and remittance of sales tax when an entity exceeds a South Dakota annual sales threshold of $100,000 or has 200 separate sales transactions. Popular press suggests the state intentionally wrote S.B. 106 to challenge Quill. The bill’s language resulted in the expeditious hearing of Wayfair in the S.D. Supreme Court. The language allows the state (with or without audit) to bring action against sellers when they meet the economic nexus threshold. It also allows the state to initiate legal action to address the constitutional validity of sales tax collection and remittance and precludes the state from enforcing the law until legal issues are resolved.

    The S.D. Sixth Judicial Circuit granted summary judgment to the defendants and enjoined the state from legal enforcement and tax collection. Citing no differences between S.B. 106 and the collection obligations invalidated in Quill, the S.D. Supreme Court upheld the Sixth Circuit. South Dakota appealed to the U.S. Supreme Court, which granted certiorari on January 12, 2018 (South Dakota v. Wayfair, Inc. et al., S.D. S. Ct., 2017 S.D. 56 (2017), cert. granted, U.S. S. Ct., Dkt. No 17-494, 1/12/2018). The Court’s Wayfair opinion is expected by June 2018.


    Will the U.S. Supreme Court overturn Quill when it rules on Wayfair, or will it split hairs? It could rely on federal precedent (set by DMA) that use tax notice and information reporting are constitutional and once again defer to Congress to settle the physical presence dilemma for sales tax collection and remittance. This is a likely scenario since the U.S. Supreme Court has denied certiorari for cases challenging click-through and affiliate nexus, and no other justices joined in Kennedy’s DMA concurring opinion to reexamine Quill’s bright-line physical presence test.

    In particular, the Court noted that DMA failed to show there was discrimination between in- and out-of-state sellers since there is some burden for all sales in Colorado. There was differential treatment instead because in-state sellers must collect and remit the tax and out-of-state sellers are subject to the notice and reporting requirements. The U.S. Supreme Court remanded the case to the Tenth Circuit and suggested dismissal under the comity doctrine (a jurisdictional courtesy where federal courts abstain from intervening in state fiscal operations). Given the Supreme Court’s denial of certiorari to DMA and its suggested comity doctrine dismissal, it appears the Court doesn’t want to get involved in state sales and use tax and perceives the appropriate jurisdiction is with the states.

    Further, the Quill opinion expressly states, “Congress is now free to decide whether, when, and to what extent the States may burden interstate mail-order concerns with a duty to collect use taxes.” There are several pending bills in Congress. Two bills—the Marketplace Fairness Act of 2017 (S.B. 976) and the Remote Transactions Parity Act (H.R. 2193)—suggest e-commerce should be subject to sales tax collection and remittance. A competing bill—No Regulation Without Representation Act of 2017 (H.R. 2887)—suggests Quill should be codified.

    While the Wayfair decision remains in limbo, companies should monitor state legislative changes to ensure compliance. Record keeping is essential, not only for compliance but also in preparation of the U.S. Supreme Court’s decision on Wayfair. Otherwise, companies could face substantial penalties or tax liabilities if audited.

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