U.S. Supreme Court Overturns Quill Physical Presence

The Supreme Court of the United States has ruled, in a 5-4 decision, that the physical presence requirement of Quill v. North Dakota (1992) for imposing a use tax collection responsibility on out-of-state retailers is no longer good law. South Dakota v. Wayfair, Inc. et al. (6/21/2018) (“Wayfair”). In its decision, the Court’s majority ruled that a state may now impose nexus by virtue of economic presence, and may ignore a company’s lack of physical presence, nullifying the long standing requirement set by Quill.

Companies operating in multiple states must now consider changing their current policies on sales tax collection as they may now be required to register and remit tax on all transactions deemed taxable based on their destination states.


In 1992, the United States Supreme Court (Court) ruled that, although the Due Process Clause of the U.S. Constitution does not require physical presence for state to impose a use tax collection responsibility on an out-of-state seller, the Commerce Clause of the Constitution requires physical presence. Because the regulation of commerce between states is typically the realm of Congress, the Court has, until the Wayfair case, left it up to Congress to pass legislation that would modify its ruling in Quill. However, since the Quill decision in 1992, Congress has not passed any comprehensive legislation applicable to the states with regard to the physical presence requirement of Quill, and states (and taxpayers) have been battling over the application and scope of this requirement ever since.

In the intervening years since the Quill decision and leading up to the Wayfair litigation, several states have attempted to force out-of-state taxpayers to collect sales or use tax by adopting either economic nexus standards (based on sales volume), or reporting requirements (reporting of in-state customers) in an effort to circumvent Quill’s physical presence requirement. South Dakota is one state that imposed such requirements, and Wayfair (and joining taxpayers) sued the state to declare South Dakota’s statute unconstitutional as in direct violation of the physical presence standard established in Quill.

Current Supreme Court Decision

In ruling for the state of South Dakota, the Court invalidated the physical presence requirement of the Quill case. In reaching its conclusion, the Court discussed several key considerations that lead to its decision that physical presence is no longer the Constitutional standard under the Commerce Clause for sales and use tax nexus:

  • The traditional limitations on States’ imposition of tax on out-of-state taxpayers are the requirements that states not discriminate against interstate commerce, nor impose an undue burden on interstate commerce. Neither of these principles necessarily impose a physical presence requirement.
  • The Supreme Court has already provided its analysis of the discrimination and undue burden issues under the Commerce Clause when it issued its ruling in Complete Auto Transit, Inc. v. Brady (1977). The Complete Auto Court ruled that state taxes will be sustained if they pass a four-part test. A tax on interstate commerce is Constitutional if 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(s) provide.

  • The physical presence requirement is out of date with today’s economy and gives out-of-state sellers an advantage over in-state sellers, who have to impose tax on in-state sales, thus having to impose a higher overall cost on customers. The Court also stated that the physical presence requirement has created distortions in the market, and referred to the physical presence requirement as a kind of judicially created tax shelter for out-of-state sellers.
  • The physical presence requirement is an arbitrary constraint on Commerce Clause cases: courts should be able to judge Commerce Clause cases on a case-by-case basis, taking into account all relevant facts.
  • The physical presence requirement from the Quill Court amounts to an imposition on States’ authority to collect taxes and perform other public functions, and has done damage to individual states’ economies.
  • Due to these considerations, the argument for sustaining Supreme Court precedent for the sake of respecting prior decisions (stare decisis) is not strong enough to maintain the physical presence requirement, given the nature of today’s economic realities.
  • With regard to the South Dakota law specifically, it does provide protection for small businesses, as businesses with less than $100,000 in annual sales, and less than 200 individual transactions, are exempt from collecting tax.

The decision was issued on June 21, 2018.

Client Considerations

Increased Enforcement: Based on the Court’s decision in Wayfair, states now have judicial authority to impose economic nexus on out-of-state taxpayers where they previously did not. In spite of the Quill physical presence requirement, prior to the Wayfair decision, 20 states had legislatively passed measures to impose either a sales / use tax collection responsibility or customer reporting requirement, based on economic nexus. Twelve of those states were “active.” Eight of those states had suspended enforcement pending the result of the Wayfair case.

No Universal Standard for Economic Nexus: In addition to the 20 states that have already passed economic nexus measures, there are 25 other states that impose sales / use tax, and now have authority to pass similar economic nexus measures. Based on current economic nexus rules, the thresholds vary substantially ranging from $10,000 in annual sales to $500,000 in annual sales with additional considerations for the number of transactions in each respective state (e.g. 200 individual transactions annually).

New or Old Constitutional Standard?: The decision in Wayfair does not prevent taxpayers from challenging the validity of the new economic nexus thresholds. According to the Wayfair Court, state laws imposing any tax or tax collection responsibility are still subject to the requirements of the Due Process and Commerce Clauses of the U.S. Constitution, which means any new tax or collection responsibility must past the four-part test of Complete Auto. For example, a taxpayer may challenge Washington’s $10,000 threshold as too low, and therefore failing the “substantial nexus” test. In order to make these type of challenges, it appears that taxpayers will need to make arguments based on cases prior to Quill, such as Complete Auto.

Taxpayers who are not currently collecting and reporting sales or use tax in states where they lack a physical presence must now monitor state developments closely to determine where the new state economic nexus thresholds are met.


Please contact our SALT group for additional guidance on how these changes may affect your business or your clients’ business.

Javier Ramirez

Partner, SingerLewak LLP [email protected]