The Supreme Court is poised to reexamine Quill and out-of-state sales/use tax for internet commerce through South Dakota’s case against Wayfair.

Wayfair: Will the U.S. Supreme Court Change How Internet Sales Are Taxed?

On April 17, 2018, the U.S. Supreme Court heard oral arguments in Wayfair, a much-anticipated case involving South Dakota’s power to impose sales/use tax collection requirements on out-of-state businesses without any physical presence in the state. In 1992, the Court upheld a so-called “physical presence” bright-line test that required an out-of-state retailer (Quill) to collect sales/use tax only if the retailer had a physical presence in the state. Almost immediately thereafter, states started chipping away at this holding. Fast forward 26 years, with the explosive growth of internet commerce rendering the physical presence of a retailer irrelevant to its customer base, states such as South Dakota are directly attacking the Court’s decision in Quill.

In 2016, South Dakota enacted a law requiring out-of-state retailers to collect sales/use tax if they have either $100,000 of receipts or more than 200 transactions in South Dakota. The state then sued Overstock and Wayfair (as well as others) in an attempt to enforce the law. South Dakota has acknowledged that this law (referred to as “economic presence”) would violate the physical presence test set forth in Quill.

Prior to the oral arguments, the overwhelming majority of tax practitioners believed that the Court granted certiorari in this case, with the intention of overturning Quill’s physical presence test. This belief was largely based on Justice Kennedy’s concurring opinion during 2015 stating that the growth in internet commerce and consumer sophistication make it “unwise to delay any longer a reconsideration of the Court’s holding in Quill.” As a result, South Dakota’s economic presence law made its way to the Court in approximately two years.  

Notwithstanding the perceived consensus prior to oral arguments, the nature of the Justices’ questions during oral arguments appear to question whether it would be appropriate to overturn Quill. The focus of the arguments included the widely varied numbers regarding the nature of the revenue lost due to the Quill physical presence test, the disparity in estimating the potential compliance burden on remote retailers if Quill were overturned, and the potential for legislation that would attempt to collect sales/use taxes retroactively (although 38 states indicated that they would not do so). In addition, the Court noted that Congress has repeatedly considered, and failed to pass, legislation that would overturn Quill, which may signal that Congress believes Quill remains a workable approach. 

The Court’s opinion is expected in June 2018. The Court’s options include (a) reaffirming Quill; (b) reaffirming Quill, but providing additional guidance on how it intended Quill to apply; (c) overturning Quill, thereby eliminating the physical presence requirement; or (d) remanding the case for a procedural or factual matter. 

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Gary Bingel's expertise focuses on state and local income taxation, and sales and use tax consulting. He has significant experience serving clients in the manufacturing, retail, pharmaceutical, biotechnology, technology and service industries.

Robert Zonenshein is an experienced Senior Tax Manager in the State and Local Tax focusing on state and local income and franchise tax consulting and compliance, sales and use tax, personal income tax and other indirect tax matters.