The DMA Way

Your Corporate Tax Blog

The tax world is an ever-changing environment, making it challenging to stay up to date. That's why we've decided to help by providing a little direction. Welcome to The DMA Way — your exclusive inside look on the latest industry trends with tax updates from across North America.

Wayfair Decision Overrules Quill Corp v. South Dakota

by DMA Staff | Sep 26, 2018

South Dakota enacted a tax statute that requires out-of-state retailers with no physical presence to the state to collect use tax if the out-of-state retailer has annual gross revenue of more than $100,000 from sales in South Dakota or completed more than 200 sales transactions annually into the state. Wayfair, Inc., an online retailer, challenged the legality of the tax statute.

On June 21, 2018, in a 5-4 decision, the United States Supreme Court overruled the 50-year old “physical presence” test established by the Court in National Bellas Hess, Inc. v. Department of Revenue, 386 U.S. 753 (1967) and affirmed in Quill Corp v. North Dakota, 504 U.S. 298 (1992), that had previously restricted a state’s lawful ability under the Commerce Clause of the Constitution to enforce its use tax collection on out-of-state retailers. South Dakota v. Wayfair, Inc., No. 17-494. The Opinion is lengthy, but DMA will attempt to answer any specific questions you may have concerning its effect on your tax department and your tax compliance obligations across the country.

It is important to note that the Court did not set aside the long-standing commerce clause test for Constitutionality established by Complete Auto Transit, Inc. v. Brady, 430 U. S. 274 (1977), holding that as pertinent to state taxation, the taxpayer must have “substantial nexus,” and the tax meet three other Complete Auto test components. In Quill, the Court had held that the “substantial nexus” test under Complete Auto required an actual physical presence in the state in order for the state’s tax to be sustained as applied to out-of-state retailers. However, 50 years later, the Court held that Quill was flawed because physical presence was not, under the Complete Auto substantial nexus test, a requisite to sustain the tax under the Commerce Clause. The Court further held that Quill created market distortions and provided a “tax shelter” for out-of-state no physical presence retailers, in that it drew an arbitrary and formalistic line that modern cases had rejected, noting that modern commerce does not align with that sort of arbitrary test. 

The Court held that modern day commerce had rendered Quill no longer viable as a nexus test under the Commerce Clause and its arbitrariness created “inequitable exceptions” in the state tax system. Ultimately, Quill prevented an even playing field for all market participants and thus, in keeping with marketing advancements, set it aside as the absolute nexus test under the Complete Auto Commerce Clause decision in 1977.

This leaves the states free to enforce the collection of their use taxes on out-of-state retailers that have no physical presence in their states, but it does not mean that all state taxation automatically survives Complete Auto scrutiny, and the Court did not so hold. The Court concluded that South Dakota’s tax statute satisfies the substantial nexus test because of the threshold set ($100,000 revenue/200 sales) and applies prospectively, and South Dakota has adopted the Streamlined Sales and Use Tax Agreement that simplifies the tax burden by requiring a single, state level tax administration, uniform definitions and rules, and simplified tax rate structures. The Court’s reliance on such features suggests any attempts by states to enforce the use tax collection against small out-of-state businesses or retroactive application of the decision could pose additional issues, as well as states that would impose additional burden because their tax systems do not provide simplified structures noted by the Court. As is true in virtually every area of Supreme Court review of state action, each statute, whether it be taxation or otherwise, will be subject to future review and analysis under Complete Auto and its progeny.

Though South Dakota’s case was the lead case, other states have enacted similar economic nexus tax statutes: Alabama, Georgia, Hawaii, Indiana, Iowa, Kentucky, Louisiana, Maine, Mississippi, Ohio, Pennsylvania, Rhode Island, Tennessee, Washington and Wyoming. Many of these same states also enacted tax statutes similar to Colorado’s, which requires out-of-state sellers with no physical presence that meet certain threshold to report their sales transactions to the Department of Revenue and to notify their customers of their use tax liabilities. Oklahoma and Vermont adopted the reporting requirement statutes. In lieu of reporting sales, the states allow the out-of-state sellers to collect and remit use taxes to the states. All states that already enacted the economic nexus statute or reporting requirement statute are in a position to act quickly to impose the duty of tax collection on out-of-state retailers.

The Court’s decision in South Dakota v. Wayfair, Inc. will not impact retailers that are already collecting and remitting taxes to a state, but if your company is doing significant business in a state where your company has no physical presence, your company may need to take action to begin collecting taxes. DMA can assist in filing the initial application and monthly reporting requirements.

Register for our free Webinar on October 3 at 3 pm or October 30 at 2 pm EDT

Learn more about DMA’s Sales and Use Tax Services

Learn more about Tax Interchange for Retail, a cloud-based software solution specifically for the special tax processing needs of retail and restaurants