On June 21, 2018, the U.S. Supreme Court decided South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), whereby the longstanding precedent of Quill Corp. v. North Dakota, 112 S. Ct. 1904 (1992), was overturned. This ruling now enables states to impose sales tax responsibilities on remote sellers. Even though the Supreme Court has now cleared a path for states to legally collect sales taxes, it has simultaneously created confusion for out-of-state sellers attempting to comply with legislative mandates.


States have long been interested in the collection of taxes on retail transactions. If the transaction is within a state’s jurisdiction, legislative mandates require the seller to collect and remit sales taxes (although the ultimate tax burden falls on the consumer). A state’s ability to impose this duty on an in-state seller becomes impeded when attempting to impose it on an out-of-state seller. Because of this, state tax collection schemes were designed not only to include a sales tax, but also a use tax, which is placed on the consumer for the privilege of using or consuming certain items within the state. This shifts the state’s tax strategy from a sales tax on the retail transaction to the consumer’s use of the item. Historically, states have attempted to require the out-of-state seller to collect and remit this tax as well, and such comprehensive taxing schemes have been the target of scrutiny over the past few decades.

One such tax scheme was at issue in National Bellas Hess v. Department of Revenue of the State of Illinois, 87 S. Ct. 1389 (1967). In this case, Illinois imposed the collection responsibility of use taxes on out-of-state sellers. The plaintiff, a mail-order catalogue business, had its principal place of business in Missouri. Illinois attempted to enforce the legal burden of collecting use taxes from Illinois customers who purchased their catalogue goods, but the Court’s decision precluded such enforcement. In its analysis, the Court ruled that in order for Illinois to enforce such a tax, there must be a substantial nexus between the activities of the out-of-state seller and the state. This substantial nexus requirement had been previously articulated in Complete Auto Transit, Inc. v. Brady, 97 S. Ct. 1076 (1977). In that case, the Court used a Commerce Clause analysis, stating that in order for a sales tax to be upheld, the tax must be applied to an activity that has a substantial nexus with the taxing state.

In further defining the parameters of a substantial nexus, the Court in National Bellas Hess included a physical presence requirement. Here, because the seller did not have a physical presence in the state of Illinois, the degree of connection with the state did not qualify as substantial, thereby limiting the reach of the tax collection mandate.

Sales tax jurisprudence continued to evolve with the Supreme Court’s ruling in 1992 in Quill. At issue here was the constitutionality of a North Dakota use tax law, much like the tax scrutinized in Bellas Hess 25 years earlier. North Dakota sought to enforce the legislative mandate of tax collecting placed upon an out-of-state seller, incorporated in Delaware, whose connections to North Dakota were limited to advertising and delivering, via common carrier, office supply products to North Dakota consumers. The court applied the physical presence nexus standard, and ultimately found that the benchmark had not been met. In effect, North Dakota was denied the ability to enforce its tax collection mandates.

With this physical presence nexus standard, the court arguably set the stage for the erosion of state tax revenues and simultaneously gave a recognizable advantage to remote sellers over their in-state competitors. This erosion of revenues was inevitably compounded by the emergence of e-commerce, which broadened the concept of remote sellers. Similar to the mail order catalogue transactions, Internet transactions were also protected from taxing jurisdictions under the prevailing physical presence nexus standard. The impact on states’ lost revenues was significant.

Historically, states have attempted to require the out-of-state seller to collect and remit this tax as well, and such comprehensive taxing schemes have been the target of scrutiny.

Subsequently, in 2015, Justice Anthony Kennedy authored a concurring opinion in Direct Marketing Association v. Brohl [135 S. Ct. 1124, 1134 (2015)] that addressed the necessity to reexamine the physical presence nexus standard previously pronounced in Quill and Bellas Hess. Although the issue in Direct Marketing Association was based on a Colorado statutory tax notice and reporting requirement, Justice Kennedy strategically utilized his concurring opinion to cue the legal community to “find a case” that would be an appropriate mechanism whereby the Court would have the opportunity to reconsider this “doubtful authority” set forth in the aforementioned cases.


Perhaps in response to Justice Kennedy’s request, in 2016 the South Dakota legislature passed a new sales tax law intended to address both the beneficial and detrimental effects of e-commerce on the state economy. The new law reconceptualized the breadth of the state’s taxing authority as it pertains to remote retailers. Focusing on an economic presence nexus as opposed to a physical presence nexus, the new tax law applied to retailers that annually delivered at least $100,000 in sales of goods or services or engaged in at least 200 individual transactions for the delivery of goods or services into the state.

As a result of noncompliance by outof-state retailers, the state of South Dakota sued three sellers: Wayfair, Inc., Overstock.com, and Newegg.com (the aforementioned Wayfair). On June 21, 2018, the Supreme Court, in a 5-4 decision, held that the prior rulings in Quill and Bellas Hess were overturned because the physical presence standard was “unsound and incorrect.” The Court recognized that the application of the physical presence standard had adverse results, such as the competitive advantage detailed above. In some situations, the remote seller even used this advantage in advertising to lure consumers.

Another inequity that emerged as a result of the physical presence standard was the missed opportunity for states to collect tax revenue on sales. A state like South Dakota, which has no state income tax, relies heavily on sales taxes for revenue. In fact, the South Dakota Department of Revenue estimated that it was losing approximately $50 million annually to untaxed out-of-state retailers.

Recognizing these inequities, the Court then pivoted to an examination of state tax validity and whether a physical presence is indeed required to meet the substantial nexus benchmark. It ultimately decided that it is not, stating, “Physical presence is not necessary to create a substantial nexus.” In its rationale, the Court mandated a recognition that technological changes have affected the marketplace; specifically, that the increasing prevalence of Internet retailers has changed consumer behavior and preferences. The Court noted that these types of retailers have numerous and varied types of economic and virtual contacts with consumers within a taxing jurisdiction and certainly reap the benefits of the privilege of carrying on their business in the state. The Court, in its ruling, stated that these extensive economic and virtual contacts with the state will satisfy the mandate that a substantial nexus exists with the state and thereby will survive constitutional scrutiny.

Returning to a Commerce Clause analysis, as derived from Complete Auto Transit, the Court addressed an additional requirement: that the law does not unduly burden interstate commerce. As applied to the sales tax situation, the imposition of tax collection and remittance duties placed upon the remote retailer cannot place too much of a burden on the remote retailer. Challenges remain, including having the remote retailer actively engage in monitoring and complying with the thousands of various state and local sales tax regimes. Although the Court remanded the case back to the Supreme Court of South Dakota for decision on this Commerce Clause issue, the Court preemptively provided the lower court with nonbinding, directly on-point dicta. The Court outlined its rationale as to why the South Dakota tax law meets the requirements under the Commerce Clause and is not an excessive burden, noting that certain retailers were excluded from the duty to collect and remit sales tax due to the specific dollar amount and transaction quantity thresholds incorporated in the statute. In addition, the Court recognized that the statute would not be applied retroactively, and that software solutions exist to assist retailers in navigating the complexities of the various taxing jurisdictions.

What’s Next?

The aftermath of Wayfair remains to be seen. States will most certainly follow South Dakota’s lead by passing similar taxing legislation that are based on an economic nexus standard; indeed, some have already done so. At this point, Congress may be inclined to pass federal legislation in order to uniformly and consistently define the breadth of such impending state laws, as it clearly has authority to do so under the Commerce Clause.

Susan R. Dana, JD is a professor of law at Black Hills State University, Spearfish, S.D.
Liz Diers, PhD, CPA is an assistant professor of accounting at Emporia State University, Emporia, Kans.