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The Supreme Court Overrules Quill Corp., Requiring Remote Vendors to Collect Sales Tax

On June 21, 2018, the United States Supreme Court issued an opinion (5-4) in South Dakota v. Wayfair, Inc., that upheld a state law requiring out-of-state sellers to collect and remit sales tax as if the seller had a physical presence in that state.  The ruling overrules the Court’s prior holding in Quill Corp. v. North Dakota, where the Court held that a state may not require a business that has no physical presence in said state to collect its sales tax.

The physical presence rule has been greatly criticized in the years following Quill Corp., as the rule arguably gave out-of-state sellers an advantage over in-state sellers in today’s predominately internet-based economy.  In its recent ruling, the Court recognized that the physical presence rule ignored today’s economic reality.

In issuing it decision, the Court reviewed the aforementioned South Dakota law against the long-standing principles of the Commerce Clause and determined that the South Dakota law is constitutional.  In its opinion, the Court rejected the holding in Quill Corp. for several reasons.  First, the Court stated “the physical presence rule is not a necessary interpretation of the requirement that a state tax must be applied to an activity with a substantial nexus with the taxing State.”  Instead, the Court held that the nexus requirement is “closely related” to the due process requirement that there be “some definite link, some minimum connection” between a state and the business the state seeks to tax, which does not require a physical presence to satisfy.  Second, the Court reasoned that its holding in Quill Corp. “creates rather than resolves market distortions” by putting local businesses in a competitive disadvantage to more remote sellers who are able to offer lower prices by avoiding the burden of collecting sales tax from their customers.  Finally, the Court determined the standard imposed by Quill Corp. is “arbitrary” and “formalistic” as it effectively “treats economically identical actors differently” for arbitrary reasons (that is, operating as a local retailer versus as a remote retailer).

The Court’s decision exemplifies the prevalence and impact the Internet has had on consumerism and the national economy, and rejects a bright-line rule in favor of a case-by-case analysis more in line with the history of Commerce Clause jurisprudence.  While states may view the Court’s decision as a victory, strengthening their ability to collect sales tax on more remote transactions, the Court identified the potential burden their decision may place on start-ups and small businesses by requiring such businesses to adhere to the complex obstacles of nation-wide sales tax collection.  While the Court seems to appreciate the financial burden this may place on start-ups and small businesses, the Court offers little guidance for comfort, and instead assumes that software or other technology will become available to help cope with the financial burden.