U.S. Supreme Court Revisits Quill and Physical Presence

Potential Far-Reaching Implications for Sellers Across the Nation

On April 17th, the U.S. Supreme Court revisited Quill Corp. v. North Dakota, which held that in order for a state to impose sales tax on an out-of-state seller, the seller must have physical presence in the state. The case is being reviewed again because the recent South Dakota v. Wayfair, Inc. suit is asking that the Quill decision be repealed.

When Quill was originally decided in 1992, internet commerce and online selling were somewhat uncommon and atypical of the times. However, in the nearly 26 years since Quill was decided, the popularity of online retail giants has soared. The Quill standard has enabled online sellers to forego collecting and remitting sales tax in states where the seller has no physical presence. The potential revenue loss for the states in uncollected sales tax is enormous – in the billions of dollars. The states rallied together and urged Congress to take action, but to no avail. Frustrated, many states have attempted to pass laws that circumvent the literal physical presence requirement and instead assert an out-of-state retailer has economic presence based on a certain sales threshold amount or transactions with customers in the state. South Dakota did just this in 2016, passing a law that stated that retailers were required to collect and remit sales tax if they either had more than $100,000 in sales, or more than 200 transactions in South Dakota. The law also set out to protect retailers from retroactive liability.

Armed with this new law, South Dakota sued four online-retailers. The retailers moved for summary judgment, arguing that the law did not meet the physical presence standard and the retailers could not be forced to start collecting sales tax. South Dakota conceded that the law cannot be enforced unless the Quill decision is overruled by the U.S. Supreme Court, and petitioned the U.S. Supreme Court for review. Because of the importance of the issues raised by the case, and that it would have a national impact on all retailers, the Justices agreed to hear the case.

South Dakota raises a number of arguments in favor of overruling the physical presence standard in Quill. First, the state argues that times have changed since 1992 and the physical presence standard has become antiquated and is a poor indicator of “nexus” in any state for sales tax purposes. The state contends that the continued adherence to the physical presence standard creates arbitrary and unfair results and brings about unjustifiable harms to the states. They point to the fact that traditional brick-and-mortar stores are at a distinct disadvantage to online retail sellers, as the physical presence rule gives online sellers an edge. In addition, the states assert that complying with sales tax laws is not overly burdensome due to modern technology and rate calculation software.

The retailers raise their own arguments in favor of affirming the Quill decision and keeping the physical presence standard intact. The retailers respond that despite advances in technology, tracking and collecting sales tax remains incredibly cumbersome and complex. They cite a GAO Report and point to the very high costs of sales tax compliance, including but not limited to software installation and implementation, legal fees, administrative costs, and keeping abreast of current sales tax laws in potentially thousands of different jurisdictions. The retailers also fear the retroactive application of an overturned physical presence standard, possibly opening the retailers up to significant exposure in multiple states. Finally, the retailers argue that Congress is in the best position to solve a national nexus problem, and ultimately, the issue should be addressed by Congress.

On April 17th, the parties presented arguments before the Supreme Court. The Justices were engaged and asked many questions. Whichever way the Justices decide to rule, this case has much broader implications than just the South Dakota statute, but will establish policy for sellers nationwide. One major point of debate was the retroactivity aspect of potentially overturning the Quill physical presence standard. Although the South Dakota statute explicitly states that it would not seek to impose retroactive liability on sellers if Quill were overturned, there is no way to predict how other states would respond. At one point during oral argument,  Deputy Solicitor General, Malcolm L. Stewart, appearing in support of South Dakota, stated his view that any overruling of Quill must result in unqualified retroactive application.

A second hot topic during oral argument was what the new standard of nexus should be if the Court were to overturn Quill. The Justices expressed concerns about how overturning Quill and the physical presence standard would impact small sellers. There is currently no definition of a small seller for nexus purposes, and some of the Justice’s questions to the parties were intended to determine what the constitutional minimum standard should be going forward if physical presence were no longer the law. Again, the Deputy Solicitor General took a very rigid stance, stating that he believed one sale into a state, no matter the price or the frequency, would be enough to subject an out-of-state seller to nexus in that state.

It is difficult to predict which way the Court will decide this case. But no matter their decision, it will be binding precedent across the country. Either the physical presence standard will continue to be the law and Quill will be upheld, or the Court will overturn Quill and set forth new nexus standards. A decision is expected sometime in June, and CSH will continue to monitor the progression of this case very carefully.


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