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Supreme Court Issues Monumental Sales Tax Decision Involving Online Retailers

On June 21, the US Supreme Court issued its decision in South Dakota v. Wayfair, clearing the path for states to impose sales tax on online and remote retailers. Previously it had long been established that a state could not impose a sales tax on a remote seller if they did not have a physical presence in the state. This meant that online retailers and other remote sellers were not required to collect and remit sales taxes in states in which they did not have a physical presence. However, in ruling in favor of South Dakota the Court has overturned this long established precedent.

Established in Quill Corp. v. North Dakota, the physical presence standard posited that in order for a taxpayer to be subject to a state’s sales tax, the taxpayer must have a physical presence in that state. This is an extension of the physical presence standard established in Bellas Hess, Inc. v. Department of Revenue of Illinois and the substantial nexus prong of the Commerce Clause test established under Complete Auto Transit Inc. v. Brady. In Quill, the taxpayer sold items for shipment through mail order catalogues to residents of North Dakota. The Court in Quill determined that North Dakota could not impose its sales tax on the taxpayer because it did not have physical presence– defined as offices, warehouses, or employees–in the state. All three of these rulings established the notion that to impose sales tax a state must have sufficient nexus, or some form of minimum contact, with the taxpayer.

However, as Justice Kennedy wrote for the majority in Wayfair, the Court could not anticipate this shift from brick and mortar retail to internet sales that has occurred since the Quill decision in 1992. As discussed by the Court, the new economic reality is that large internet retailers have as much of an influence in states as any local stores. According to the decision, states lose between $8 and $33 billion annually on sales tax revenue, with South Dakota losing between $48 and $58 million each year. Furthermore, the number of Americans with internet access has skyrocketed from less than 2 percent in 1992 to 89 percent today. This has led to an e-commerce market generating more than $500 billion annually. As such, the Quill decision had put brick and mortar retailers at a disadvantage by requiring them to collect and remit sales tax.

It is in light of this impact of Quill and Bella Hess in the evolving economy that that the Court reached its decision in Wayfair.  In ruling in favor of South Dakota, the Court addressed three of the common arguments in support of Quill. First, Justice Kennedy opined that the physical presence standard of Quill was “an incorrect interpretation of the Commerce Clause.” Although substantial nexus is a requirement for a state to impose its tax on a taxpayer, the physical presence standard is “not a necessary interpretation of Complete Auto’s nexus requirement.” The Court then points that South Dakota’s law requires a remote seller meet certain minimum contact requirements to be subject to its state sales tax, including the delivery of a minimum of at least $100,000 of goods or services to the state or engaging in at least 200 separate transactions within the state.

Second the Court rejected the argument that requiring taxpayers to collect sales tax for potentially thousands of jurisdictions would be too burdensome. The Court opined that in the modern economy the cost of administrative compliance is not connected to a taxpayer’s relative size, and that a small taxpayer’s burden of compliance is equal to or maybe more than that of a large remote seller. To illustrate this point the Court wrote:

Lastly, the Court addressed the notion that this is an area that would be better suited for Congress to address. Although Kennedy agrees that Congress has the authority to change the physical presence standard, he concedes that “[i]t is inconsistent with the Court’s proper role to ask Congress to address a false constitutional premise of this Court’s own creation.”

Although this decision is a seismic shift in the way that sales taxes have been applied, the Court has not given states carte blanche to impose taxes without boundaries. The physical presence standard of Quill may have been reversed, but minimum contacts are still required under the Complete Auto test. Additionally, the Court pointed to the limits of the South Dakota law, such as a lack of retroactivity, the minimum economic requirements discussed above, and the fact that South Dakota is a member of the Streamlined Sales Tax Association, as factors that reduced the burden on interstate commerce. Even so, online retailers and other remote sellers should note the changing sales tax landscape created by Wayfair and be prepared for its impact. Should you have any questions regarding state and local tax issues, or any other complex tax issue please contact Steven Miller, alliantgroup, LP’s National Director of Tax, at


Contact our team today with any tax controversy concern you’re facing. We fight every day to protect the interests of the taxpayer, and we look forward to putting you in the best tax situation possible.


Contact our team today with any tax controversy concern you’re facing. We fight every day to protect the interests of the taxpayer, and we look forward to putting you in the best tax situation possible.

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