Supreme Court Decides Wayfair Online Sales Tax Case; Quill “Physical Presence” Test Eviscerated


Earlier today, the U.S. Supreme Court handed down its much-anticipated decision in South Dakota v. Wayfair.  The case challenges South Dakota’s imposition of its sales tax on Internet retailers who sell into South Dakota but have no property or employees in the state.  At issue was the 1992 Quill Corp. v. North Dakota ruling, which established “physical presence” test for determining when and where sales taxes could be imposed on transactions involving out-of-state sellers.

While our tax attorneys are still analyzing the Court’s majority opinion, concurrences and dissents, the clear and obvious takeaway from the Wayfair decision is that the Quill “physical presence” test is no longer the Law of the Land, thus paving the way for state tax authorities and state legislatures to begin extending sales taxes to online and e-commerce retailers.  The broader implications of the ruling on the Communications sector (including over-the-top VoIP, UCaaS, sales of prepaid PINS and other calling services) are currently being evaluated by our team of tax attorneys.

Contact us for more information or to determine how the Court’s ruling impacts your business.  Our tax team is standing by!

Allison D. Rule – Email: / Phone: 703-714-1312

Jackie R. Neff – Email: / Phone: 703-714-1314

Jonathan S. Marashlian – Email: / Phone: 703-714-1313


The Tax Foundation Summarized the Court’s ruling in a recent post:

Drumroll…South Dakota won. The Court laid out why South Dakota’s law is no burden to interstate commerce but made clear that more complex or overreaching laws would be. This was not too surprising, as during oral argument the justices expressed such frustration with the issue that it’s easy to see why they wouldn’t want this to be just the first of many cases. Better to articulate the rule well here. (We had filed a brief in the case, in support of neither party, urging the Court to uphold South Dakota’s law but draw a clear line preventing more problematic laws from being held as valid.)

As Justice Kennedy’s opinion states:

That said, South Dakota’s tax system includes several features that appear designed to prevent discrimination against or undue burdens upon interstate commerce. First, the Act applies a safe harbor to those who transact only limited business in South Dakota. Second, the Act ensures that no obligation to remit the sales tax may be applied retroactively. S. B. 106, §5. Third, South Dakota is one of more than 20 States that have adopted the Streamlined Sales and Use Tax Agreement. This system standardizes taxes to reduce administrative and compliance costs: It requires a single, state-level tax administration, uniform definitions of products and services, simplified tax rate structures, and other uniform rules. It also provides sellers access to sales tax administration software paid for by the State. Sellers who choose to use such software are immune from audit liability. See App. 26–27. Any remaining claims regarding the application of the Commerce Clause in the absence of Quill and Bellas Hess may be addressed in the first instance on remand.

The majority opinion, which twice cited the Tax Foundation’s brief, was authored by Justice Anthony Kennedy, joined by Justices Clarence Thomas, Samuel Alito, Ruth Bader Ginsburg, and Neil Gorsuch. Justice Thomas concurred to write that he should have joined the Quill dissent in 1992. Justice Gorsuch concurred, joining the majority in full and adding that he questions Commerce Clause doctrine. Four justices (Chief Justice John Roberts, Justice Stephen Breyer, Justice Sonia Sotomayor, and Justice Elena Kagan) dissented, agreeing that the Court got it wrong before but arguing that Congress should fix it.

All eyes will now turn to Congress and the states. Congress has been stymied between alternate versions of federal solutions: the Remote Transactions Parity Act (RTPA) or Marketplace Fairness Act (MFA), which lets states collect if they agree to simplify their sales taxes, and a proposal from retiring Rep. Bob Goodlatte (R-VA) that would make the sales tax a business obligation rather than a consumer obligation, and have it collected based on the tax rate where the company is located but send the revenue to the jurisdiction where the customer is located. RTPA and MFA are more workable and more likely to pass, but Goodlatte controls what makes it to the House floor, so nothing has happened. Maybe today’s decision will change that.

In the states, a reminder, 31 states currently have laws taxing internet sales. Today’s decision will certainly change how states look at these laws but we may see states trying to see if their versions could survive even if they are less simplified and direct than South Dakota’s law. This ruling is not a blank check for states. The Court specifically observed that South Dakota’s law, and its tax laws generally, minimizes the burden on interstate commerce. Other states should craft their laws accordingly.

The case is South Dakota v. WayfairNo. 17-494.

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