June 21, 2018

Online Retailers Reeling as Supreme Court Overturns Quill in Landmark Sales Tax Ruling (article)

SCOTUS Ruling on WayfairFifty years of sales tax policy in the United States is coming to an end. In South Dakota v. Wayfair Inc. (Wayfair), the U.S. Supreme Court on June 21 ruled in a 5-4 decision that the physical presence standard for sales tax collection is no longer the law of the land. Retailers across the nation must prepare for a profound increase in sales tax collection responsibilities as states adapt their laws to this new judicial standard.


The physical presence standard has been the cornerstone of sales tax policy in the United States for the last half century. The standard was first imposed by the Supreme Court in 1967 in National Bellas Hess, Inc. v. Department of Revenue of Illinois. In 1992, the Supreme Court in Quill Corp. v. North Dakota (Quill) confirmed the applicability of the physical presence standard. The physical presence standard in simple terms requires a retailer to have physical presence in a state before that state can impose sales tax collection requirements on the retailer's in-state sales. The Quill decision is an interpretation of the "substantial nexus" standard that existed under the broader Constitutional criteria for taxation in the United States first enunciated in Complete Auto Transit, Inc. v. Brady, which stated that a tax must:

  1. Apply to an activity with a substantial nexus with the taxing State;
  2. Be fairly apportioned;
  3. Not discriminate against interstate commerce; and
  4. Be fairly related to the services that State provides.

The proliferation of online retail business since the Quill decision allows a vast number of merchants without physical presence in a state to sell goods or services that are "free" of sales tax. Consumers are required in these circumstances to remit use tax on their purchases; however, compliance under this self-assessment system is notoriously low. The Court in Wayfair noted that states lose between $8 and $33 billion every year as a consequence of this framework, where ". . . the impracticability of [this] collection from the multitude of individual purchasers is obvious."

The Wayfair ruling

Justice Kennedy delivered the majority opinion in Wayfair, joined by Justices Thomas, Ginsburg, Alito and Gorsuch (Justices Roberts, Breyer, Sotomayor and Kagan dissented). In the majority opinion, the Court notes that ". . . the physical presence rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause." The Court then provided three reasons to support its decision to overturn Quill:

  1. The physical presence rule "is not a necessary interpretation" of the requirement that an activity must have a substantial nexus with the taxing State;
  2. The physical presence rule "creates rather than resolves market distortions;" and
  3. The physical presence rule is an "arbitrary, formalistic distinction" disavowed by modern precedents to the Commerce Clause.

In bolstering its rationale to overturn Quill, the Supreme Court in Wayfair frequently cites injustices associated with sales tax policy that has been applied to online businesses and their "brick and mortar" counterparts. According to the Supreme Court [citations omitted]:

Quill puts both local businesses and many interstate businesses with physical presence at a competitive disadvantage relative to remote sellers. Remote sellers can avoid the regulatory burdens of tax collection and can offer de facto lower prices caused by the widespread failure of consumers to pay the tax on their own. This "guarantees a competitive benefit to certain firms simply because of the organizational form they choose" while the rest of the Court's jurisprudence "is all about preventing discrimination between firms." In effect, Quill has come to serve as a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a State’s consumers—something that has become easier and more prevalent as technology advanced.

In deciding to overturn Quill, the Supreme Court in Wayfair also had to wrestle with the judicial doctrine of stare decisis, a principle that precedent should govern current determinations. It is this matter that the dissenting opinion in Wayfair seemed to find most compelling. Justice Roberts observed in the dissenting opinion that "This is neither the first, nor the second, but the third time this Court has been asked whether a State may obligate sellers with no physical presence within its borders to collect tax on sales to residents. Whatever salience the adage 'third time's a charm' has in daily life, it is a poor guide to Supreme Court decision making." The dissenting opinion went on to observe that because the stare decisis principle applied with "special force" in the previous Quill decision, that "it should be an even greater impediment to overruling precedent now."

However, the majority opinion of the Wayfair Supreme Court noted that stare decisis ". . . is not an inexorable command," and went on to provide that the principle no longer can be used by the Court to prohibit the valid exercise of the States' sovereign power. This notion was based on the Supreme Court's view that its previous decision in Quill was in error, a point with which even the dissenting opinion agreed.

The dissenting opinion also noted that the present matter is one that should be left to Congress to remedy, because Congress has greater flexibility to address the concerns of various stakeholders as it crafts current policy. The majority opinion found 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," and that "[i]t is currently the Court, and not Congress, that is limiting the lawful prerogatives of the States."


The Wayfair decision represents a watershed moment in the United States for sales tax policy. While it affects South Dakota sales tax law immediately, many other states are sure to adapt their laws in short order. The Supreme Court in Wayfair noted that 41 States, two Territories, and the District of Columbia all asked the Court to reject the physical presence test under Quill, so there is obvious widespread interest by the States to move in a similar direction.

The Wayfair decision will affect retailers in all industries, ranging from corporate behemoths to the smallest startup companies. The idea behind the Supreme Court's ruling is to put all of these retailers on a level playing field with regard to sales tax collection requirements. But, smaller businesses naturally have fewer resources to adapt with the multitude of varying sales tax laws across all of the tax jurisdictions in the United States. As the dissenting opinion in Wayfair noted, there are over 10,000 of such jurisdictions, each with different rates, varying application to products or services sold, and varying scope of substantial presence standards.

Because the Wayfair decision is merely the tip of the iceberg, all businesses in the United States must immediately begin to plan for systems that can accommodate a profound increase in sales tax collection and compliance across the country. For more information about the Wayfair decision and how it will impact your business, please contact your local CBIZ MHM tax professional.

Copyright © 2018, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

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