Out with the Old, In with the New—The U.S. Supreme Court’s Wayfair Decision, the Internet, and the Collection of Sales Tax



In South Dakota v. Wayfair, Inc., the U.S. Supreme Court (“Court”) overruled its previous decisions in Quill Corp. v. North Dakota and National Bellas Hess, Inc. v. Department of Revenue of Ill. The Court concluded that the “presence rule” from Quill, which only allowed states to tax retailers if they maintained a physical presence such as “retail outlets, solicitors, or property within [the] State,” was unsound and incorrect.

The Court supported its opinion by illustrating the contradiction between the rule from Complete Auto Transit, Inc. v. Brady and the “presence rule.” It reasoned that the “presence rule” created a disadvantage between remote sellers and local or interstate businesses with a physical presence within the state imposing the tax.  Additionally, the Court noted that Quill had evolved into a judicially created tax shelter for businesses which had chosen to limit their physical presence within a state, but still target the state’s consumers. The Court concluded that Quill ended up creating the very market distortions that the Dormant Commerce Clause is meant to prevent.

Additionally the Court disparaged its decision in Quill for being too formalistic, and advocated for such Commerce Clause analysis to take place on a case-by-case basis on the merits of a tax’s purpose and effects. In the absence of the “presence rule,” the Court reverted back to its test from Complete Auto, which stated: “The Court will sustain a tax so long as it (1) applies to an activity with a substantial nexus with the taxing State, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services the State provides.” The Court said that “[s]uch a nexus is established when the taxpayer or collector ‘avails itself of the substantial privilege of carrying on business’ in that jurisdiction.”

The Court went on to note the South Dakota statute in question ensured that any business being taxed would have a sufficient nexus with South Dakota. The statute only applies to businesses that sell more than $100,000 of goods or services within the State or engage in 200 or more transactions for the delivery of goods or services within the State in a year. The companies at issue (Wayfair, Inc., Overstock.com, and Newegg, Inc.) were large, national companies with pervasive online presences. As such, the Court felt no further analysis was necessary to determine that there was a sufficient nexus between them and the State to justify the tax being applied to them.

Looking forward, the Court noted that other issues remain ahead for taxes such as the one in South Dakota which were not decided in Wayfair. Such issues directly relate to the test in Complete Auto and traditional Dormant Commerce Clause analysis. They are the last three prongs of the Complete Auto test: whether the tax is fairly apportioned, whether or not it discriminates against interstate commerce, and whether or not it is fairly related to the services the State provides. The case has now been remanded for further proceedings consistent with the Court’s opinion in Wayfair. However, this decision has opened up the door for States to pass legislation that requires online retailers to remit sales tax to all States in which such companies do business where such legislation and the retailer’s contacts with the State satisfy the test in Complete Auto.