Press Room: Tax Release

June 21, 2018

Supreme Court Overturns Quill – Sales Tax Physical Presence Standard Is No More

On June 21, 2018, the United States Supreme Court (the Court), in a 5-4 vote, issued its decision in South Dakota v. Wayfair, Inc. (Wayfair). The Court ruled in favor of overturning a 1992 precedent, Quill Corp. v. North Dakota (Quill), which effectively prevented states from requiring sellers to collect and remit state sales taxes unless a business has physical presence in the state. The Court vacated the judgment of the Supreme Court of South Dakota, and remanded the case for further proceedings consistent with the overturning of the physical presence standard.


In 2015, South Dakota enacted a law that asserted nexus within the state for an out-of-state seller without physical presence. South Dakota initiated the lawsuit in Wayfair in an attempt to affirm the validity of their newly enacted law and its applicability to the defendants―large out-of-state sellers believed to meet the threshold―to collect and remit sales tax. South Dakota’s law created a new standard of economic presence, where nexus is established by a threshold of $100,000 in total gross sales in the state or by having more than 200 different transactions to residents in the state.

For further discussion of the nexus landscape prior to the Court’s decision and the issues at stake in Wayfair for states and out-of-state sellers, please see our prior Tax Release.


In its decision, the Court overturned Quill’s physical presence standard, stating the standard is not a necessary interpretation of the requirement that a state tax must be applied to an activity with substantial nexus with the taxing state. The Court added that the physical presence standard created rather than resolved market distortions, and created arbitrary distinctions that do not apply to the modern age where e-commerce is the norm. The Court chose not to establish a bright-line test to determine whether a taxpayer has substantial nexus with a taxing state.


The Court did not resolve the question whether a state may impose a sales tax obligation retroactively. The Court recognized that the law may contain other constitutional defects that impose undue burdens on interstate commerce aside from the nexus threshold. In upholding the South Dakota statute, the Court noted that the law contains protections against such burdens, including no requirement to remit sales tax retroactively. The Court stopped short of requiring prospective application of its decision, leaving an open question whether any state may retroactively impose a sales tax obligation upon a remote seller that lacks physical presence.

Whether other states would allow their rule to apply retroactively is a merited concern for businesses. Out-of-state sellers that have not been collecting sales tax could be exposed to large amounts of liability because the statutes of limitation do not start running until returns are filed.

If applied retroactively, all out-of-state sellers not currently registered to collect and remit sales and use taxes may want to take the following steps:

  1. Determine the nexus requirements and the period of retroactivity for all state and local jurisdictions in which sales are delivered.
  2. Analyze historical tax obligations that would have been owed over the period of retroactivity.
  3. Consider whether any exposures may require disclosure for financial statement purposes under ASC 450.
  4. Consider options for mitigating liabilities such as voluntary disclosure programs, which offer limited lookback periods, abatement of civil and criminal penalties, and in some cases partial or full abatement of interest.

The Takeaway

All out-of-state sellers not currently registered or remitting sales taxes in states in which they have customers should revisit their sales tax obligations. First, remote sellers, including non-U.S. companies selling into the United States, should carefully consider not only whether they meet the new nexus standards established by this ruling but also any additional specific thresholds/requirements enacted by the states and their localities. This requires a review of historical sales activity and the nexus thresholds in each jurisdiction. Going forward, companies will need a process in place to track and record all sales within every state and applicable localities imposing economic thresholds in order to calculate whether they meet the specific economic presence standards of that state/locality.

Given the Court’s decision to overturn the physical presence standard, it is likely that more states will enact new nexus legislation moving away from physical presence and more towards bright-line standards that are similar to South Dakota’s economic nexus law. It is also possible Congress may exercise its affirmative power to regulate commerce and enact legislation to clarify the substantial nexus threshold. While the Court put an end to the Quill physical presence standard, the resulting issues are far from resolved. Please stay tuned to future releases.