The United States Supreme Court granted cert in South Dakota v. Wayfair, et al., the lead case challenging the Court’s “physical presence” nexus rule announced in National Bellas Hess v. Illinois2 and reaffirmed in Quill Corp. v. North Dakota.3
This case directly involves South Dakota S.B. 106, which imposes a sales tax collection obligation on an out-of-state seller if it:
- makes over $100,000 in gross revenue from sales of tangible personal property or services delivered to South Dakota; or
- completes 200 or more separate transactions for delivery to South Dakota.4
The case began when South Dakota brought an action seeking a judicial declaration that the requirements of S.B. 106 were valid and applicable to four out-of-state retailers: Overstock.com, Newegg, Systemax, and Wayfair (collectively, the “Retailers”). The Retailers filed a motion for summary judgment, arguing that there was no issue of material fact because the sales tax collection obligation of S.B. 106 directly contradicts the physical presence nexus rule of National Bellas Hess and Quill.5 The Sixth Judicial Circuit of South Dakota and the Supreme Court of South Dakota agreed and granted the Retailers’ motion.
The question immediately before the Court is whether the motion for summary judgment was properly granted and affirmed by South Dakota state courts. What is unclear, however, is whether the Court will take this case as an opportunity to revisit Quill’s physical presence rule, as recommended by Justice Kennedy in his concurring opinion in Direct Marketing Association v. Brohl.6
Regardless of the Court’s eventual decision in South Dakota v. Wayfair, the decision will directly impact similar “kill-Quill” laws (for example, Indiana, Wyoming) and regulations (for example, Alabama). What is unclear, though, is what impact the Court’s decision will have on other state efforts to distinguish Quill, rather than directly overruling it.
Colorado’s reporting regime was upheld as constitutional by the U.S. Court of Appeals for the Tenth Circuit in Direct Marketing Association v. Brohl.7 After the Court denied cert in that case, several states enacted similar reporting regimes. If the Court ultimately affirms Quill’s physical presence rule in South Dakota v. Wayfair, will more states follow Colorado’s lead and enact similar reporting regimes?
Other states have attempted to limit Quill by taking a broad view of physical presence—and the Court’s eventual decision in South Dakota v. Wayfair may not impact those efforts. For example, Massachusetts has promulgated a so-called “cookie nexus” regulation that is premised on the assertion that certain vendors have sufficient physical in-state presence through the use of software and complimentary text data files, known as “cookies,” located on computers of their in-state customers, thus satisfying the requirement of Quill.8
Similarly, the Court’s eventual decision may not immediately impact state attempts to impose sales tax collection or reporting obligations on “platforms.” Minnesota, Pennsylvania, Rhode Island, and Washingtonhave recently enacted regimes requiring companies that facilitate sales by providing an online marketplace to collect sales tax on sales certain remote sellers, or comply with burdensome reporting regimes.9 These regimes raise issues under the Due Process Clause of the United States Constitution and the Internet Tax Freedom Act.
Taxpayers and state revenue departments may be hoping that the Court’s decision in South Dakota v. Wayfairwill provide much needed clarity regarding the constitutional limits on state taxing authority. But no such clarity is guaranteed. If the Court reaffirms Quill’s physical presence rule, questions may remain on the scope and reach of the physical presence rule. And if the Court announces a new bright-line rule, there is no certainty that the rule will prove any easier to administer than Quill’s physical presence rule. Taxpayers should closely monitor this litigation and new state efforts to enforce their sales and use tax laws in the future.