United States Supreme Court Overrules 'Quill'

DALLAS, June 21, 2018 /PRNewswire/ -- On June 21, 2018, the United States Supreme Court ("Court") issued its long-awaited decision in South Dakota v. Wayfair—a test case to invalidate the physical-presence standard established by National Bellas Hess v. Dep't of Revenue, 386 U.S. 753 (1967) and affirmed by Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Under National Bellas Hess and Quill, sellers who do not have a physical presence in a state or other taxing jurisdiction could not be compelled to collect the jurisdiction's sales or use tax. In a 5-4 decision, the Court expressly overruled Quill and National Bellas Hess. Therefore, South Dakota's law imposing sales tax collection obligations on certain remote sellers with no physical presence in the state is constitutional and enforceable.

In Wayfair, the Court examined the history of Commerce Clause jurisprudence, as well as the stated justifications in both National Bellas Hess and Quill for exempting remote sellers from the obligation to collect state and local taxes. Writing for the majority, Justice Anthony Kennedy ruled that the physical presence requirement was an artificial and arbitrary rule. He said that the physical presence standard impermissibly encroached on state sovereignty and actually resulted in discrimination against intrastate commerce by incentivizing tax avoidance by remote sellers engaged in interstate commerce. He noted that the physical presence standard did not reflect the reality of the Internet age, in which the largest retailers in the United States are engaged in e-commerce rather than traditional, brick-and-mortar commerce. Finally, he observed that the Supreme Court should not keep "passing the buck" to Congress to resolve the disparate treatment between in-state and remote sellers; he held that the physical presence standard was constitutionally infirm and that it was the Court's responsibility to correct its own "mistake."

The Court remanded the case to the Supreme Court of South Dakota for further proceedings consistent with its decision. As a practical matter, we now know the following:

• Quill and National Bellas Hess are overruled;
• States are empowered to impose sales and use tax collection obligations on remote sellers, subject to the four-prong test of Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), which (among other things) requires a sufficient connection between the taxpayer and the state to warrant the imposition of state tax authority; and
• South Dakota's law is constitutional under Complete Auto Transit.

South Dakota requires remote sellers with sales of $100,000 of goods or services annually to South Dakota consumers, or 200 or more separate transactions of goods or services for delivery to South Dakota, to collect its tax. Further, the law is not retroactive; it expressly takes effect only if it is ultimately upheld in the courts. (The Court also noted that South Dakota is a Streamlined State, although this does not appear to be determinative of a state's authority to require remote sellers to collect tax.) It is possible that another state's law could still run afoul of Complete Auto Transit, depending on how aggressively the state pursued remote sellers. The Court essentially promised to evaluate such laws on a "case-by-case" basis in lieu of applying the blanket requirement of physical presence.

Visit ryan.com/wayfair for breaking news and analysis related to this decision.

South Dakota v. Wayfair, Inc., 585 U.S. __ (2018).

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