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Supreme Court Watch: States Can Require Retailers to Collect Sales Tax

Howard K. Jeruchimowitz

In a 5-4 majority written by Justice Anthony Kennedy in one of his last decisions, the Supreme Court holds that the Commerce Clause of the U.S. Constitution did not prohibit South Dakota from enacting legislation that required remote sellers to collect and remit sales tax on goods and services sold for delivery in the state, even if the business does not have a physical presence within the state. Wayfair v. South Dakota, 138 S. Ct. 2080 (2018). By doing so, the majority overrules the physical-presence rule of Quill Corp. v. North Dakota, 504 U.S. 298 (1992) as unsound and incorrect, as well as National Bellas Hess, Inc., v. Department of Revenue of Ill., 386 U.S. 753 (1967).

Background of South Dakota law

Many states, including South Dakota, tax the retail sales of goods and services within the state. Sellers collect and remit the tax to the state, and consumers are responsible for paying a use tax at the same rate if the sellers fail to do so. However, under National Bellas and Quill, South Dakota, or any other state, could not require a business that has no physical presence in the state to collect its sales tax. Due to the erosion of its sales-tax base and the loss of critical funding for state and local services, the South Dakota legislature enacted a law requiring out-of-state sellers to collect and remit sales tax as if the seller did have a physical presence within the state. The act covers sellers that, on an annual basis, deliver more than $100,000 of goods or services in the state or that engage in 200 or more separate transactions for the delivery of goods or services into the state.

South Dakota filed suit in state court seeking a declaration that the act’s requirements are valid and applicable to respondents who are top online retailers with no physical presence in South Dakota and who meet the acts’ minimum sales or transaction requirement but do not collect the state’s sales tax. South Dakota also sought an injunction requiring respondents to register for licenses to collect and remit the sales tax. South Dakota conceded that its act cannot survive under Bellas Hess and Quill but asserted the necessity of asking the Supreme Court to review the earlier decisions in light of economic realities.

The trial court granted the respondents’ summary judgment based on the South Dakota Act’s being unconstitutional as set forth in the controlling Quill case. The South Dakota Supreme Court affirmed, stating: “However persuasive the State’s arguments on the merits of revisiting the issue, Quill has not been overturned [and] remains the controlling precedent on the issue of Commerce Clause limitations on interstate collection of sales and use taxes.” (138 S. Ct. at 1089.)

The majority opinion

The salient points to the Wayfair majority opinion are addressed herein.

  1. Taxing the sales in question is lawful; the question is whether the out-of-state seller can be held responsible for its payment that turns on a proper interpretation of the Commerce Clause.
  2. The court in the National Bellas and Quill cases held that an out-of-state seller’s liability to collect and remit the tax to the consumer’s state depended on whether the seller had a physical presence in that state, and that mere shipment of goods into the consumer’s state, following an order from a catalog, did not satisfy the physical presence requirement.
  3. The majority first summarized the Commerce Clause and surveyed the general development of the law[1]:
  • The Constitution grants Congress the power “[t]o regulate Commerce…among the several States.” Art. 1, §8, cl. 
  • Although the Commerce Clause is written as an affirmative grant of authority to Congress, the Court has held that in some instances it imposed limitations on states, absent congressional action. But “in general Congress has left it to the Court to formulate the rules” to preserve “the free flow of interstate commerce.”
  • Early cases interpreted commerce broadly as “the interchange of commodities” and “commercial intercourse” and that there was concurrent regulatory power by the federal government and the states.
  • The Court’s doctrine developed into two primary principles: (1) state regulations may not discriminate against interstate commerce, and (2) states may not impose undue burdens on interstate commerce. 

4. These same principles apply to the validity of state taxes. The Court will sustain a tax so long as it (a) applies to an activity with a substantial nexus with the taxing state, (b) is fairly apportioned, (c) does not discriminate against interstate commerce and (d) is fairly related to the services the state provides.[2]

5. Started in Bellas Hess and affirmed in Quill, the case law developed a physical presence rule to compel an out-of-state retailer to collect local taxes, premised on the “substantial nexus” prong, to prevent undue burden on interstate commerce.[3] Justice Kennedy recognizes that in Quill, he, Justice Scalia and Justice Thomas upheld the physical presence rule on stare decisis alone. Justice White dissented in relevant, arguing that: “There is no relationship between the physical presence nexus rule the Court retains and Commerce Clause considerations that allegedly justify it.”[4]

6. As a result of the physical presence rule becoming further removed from economic reality, which results in significant revenue losses to the states, Justice Kennedy reverses himself and found Quill flawed for three main reasons: First, 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.” Second, Quill creates rather than resolves market distinctions. Third, Quill imposes the sort of arbitrary, formalistic distinction that the Court’s modern Commerce Clause precedents disallow.[5]

Quill overturned

In now rejecting Quill, the majority recognizes that Quill puts local business and many interstate businesses with physical presence at a competitive disadvantage relative to remote shelters. In effect, Justice Kennedy wrote, “Quill has come to serve as a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a state’s consumers — something that has become easier and more prevalent as technology has advanced.”[6] Justice Kennedy then recognized that the physical  presence rule produces an incentive to avoid a physical presence in multiple states, which results in the market’s lacking storefronts, distribution points and employment centers that would be efficient or desirable. “Rejecting the physical presence rule is necessary to ensure that artificial competitive advantages are not created by this Court’s precedents.”[7]

“The Quill Court itself acknowledged that the physical presence rule is ‘artificial as its edges.’ That was an understatement when Quill was decided; and when the day-to-day functions of marketing and distribution in the modern economy are considered, it is all the more evident that the physical presence rule is artificial in its entirety.[8]

The majority then opined that the physical  presence rule of Bellas Hess and Quill is not just a technical legal problem, but also an extraordinary imposition on the States’ authority to collect taxes and perform critical public functions.[9] “In the name of federalism and free markets…[t]he physical presence rule [Quill] defines has limited States’ ability to seek long-term prosperity and has prevented market participants from competing on an even playing field.”[10]

In recognition of removing the physical presence rule, the majority recognizes that new issues that Congress may choose to legislate will surface, such as burdens for small companies that make a small volume of sales in other states or differing categories of goods that are taxed. The Court acknowledges that the South Dakota law affirmed a reasonable amount of protection for these types of businesses.[11] The majority opinion also recognizes that other aspects of the Court’s Commerce Clause doctrine can protect against any undue burden on interstate commerce, taking into consideration the small businesses, startups or others that engage in commerce across state lines.[12] Justice Kennedy has left the door open to other challenges:

If some small businesses with only de minimis contacts seek relief from collection systems thought to be a burden, those entities may still do so under other theories. These issues are not before the Court in the instant case; but their potential to arise in some later case cannot justify retaining this artificial, anachronistic rule that deprives States of vast revenues from major businesses.[13]

Upon removal of the physical presence rule, the Court ruled that the tax applied to an activity with a substantial nexus with South Dakota under the threshold requirements of the Act. The Court remanded the case to the lower court with the physical presence rule overturned, but other questions remain:

The question remains whether some other principle in the Court’s Commerce Clause doctrine might invalidate the Act. Because the Quill physical presence rule was an obvious barrier to the Act’s validity, these issues have not been litigated or briefed, and so the Court need not resolve them here.[14]

However, Justice Kennedy cautions: “That said, South Dakota’s tax system includes several features that appear designed to prevent discrimination against or undue burdens upon interstate commerce.”[15]

The concurring opinions

Justices Thomas and Gorsuch filed concurring opinions. Justice Thomas recognized that, upon reflection, he should have joined Justice White in dissenting in Quill to overturn the physical presence rule.[16] “Today, I am slightly further removed from Quill than Justice White was from Bellas Hess. And like Justice White, a quarter century of experience has convinced me that Bellas Hess and Quill “can no longer be rationally justified,”[17] Justice Thomas goes further and proclaims that his views have morphed for the Court’s entire negative Commerce Clause jurisprudence.[18]

Justice Gorsuch joined the majority to overturn Quill because the rule created an out-of-state tax break. Recognizing that the dormant Commerce Clause “usually prevent[s] States from discriminating between in-state and out-of-state firms,” Justice Gorsuch opines that National Bellas and Quill did just that by enforcing “a judicially created tax break for out-of-state Internet and mail-order firms at the expense of in-state brick-and-mortar rivals.”[19]

Justice Gorsuch agrees with Justice White’s dissent in Quill that “judges have no authority to construct a discriminatory ‘tax shelter’ like this”[20] (citation omitted). Like Justice Thomas, Justice Gorsuch suggests there are issues with other aspects of the dormant clause: “My agreement with the Court’s discussion of the history of our dormant Commerce Clause jurisprudence, however, should not be mistaken for agreement with all aspects of the doctrine.”[21] Justice Gorsuch explains that although the Commerce Clause is found in Article I that authorizes Congress to regulate interstate commerce, the dormant commerce cases suggest Article III courts may invalidate state laws that offend no congressional statute.[22] “Whether and how much of this can be squared with the text of the Commerce Clause, justified by stare decisis, or defended as misbranded products of federalism or antidiscrimination imperatives flowing from Article IV’s Privileges and Immunities Clause are questions for another day.”[23]

The dissenting opinion

The dissenters, led by Chief Justice John Roberts, decline the invitation to overturn National Bellas Hess and Quill. Chief Justice Roberts agrees that Bellas Hess was wrongly decided 50 years ago, but that because of e-commerce and other changes to our economy this is best left for Congress to fix.[24] Chief Justice Roberts reasons:

The Court argues in favor of overturning [the Bellas Hess] decision because “Internet’s prevalence and power have changed the dynamics of the national economy.” But that is the very reason I oppose discarding the physical-presence rule. E-Commerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical-presence rule. Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress. The Court should not act on this important question of current economic policy, solely to expiate a mistake it made over 50 years ago.”[25]

In addition, the dissent emphasizes that the Court does not overturn its precedents lightly, especially in fields in which Congress exercises primary authority and can override the Court’s decision with contrary legislation.[26] And the Court has applied this heightened form of stare decisis in the dormant Commerce Clause precedents.[27] In emphasizing stare decisis should have applied with even greater force here, since the Court was asked to overturn the physical-presence rule in Quill but declined to do so and instead deferred to Congress, Chief Justice Roberts states:

This is neither the first, nor the second, but the third time this Court has been asked whether a State may obligate sellers with no physical presence within its borders to collect tax on sales to residents. Whatever salience the adage “third time’s a charm” has in daily life, it is a poor guide to Supreme Court decisionmaking.[28]

The dissent then points out examples in the last 16 years in which Congress has been considering legislation to alter the physical-presence rule.[29] With respect to the same data the majority relied on, Chief Justice Roberts reads it in a different light: “To the extent the physical-presence rule is harming States, the harm is apparently receding with time.”[30]

Finally, the dissent challenges the Court’s reliance on the present realities of the interstate marketplace and e-commerce. Chief Justice Roberts’ concern is that “the present realities of the interstate marketplace include the possibility that the marketplace itself could be affected by abandoning the physical-presence rule.”[31] The dissent concludes that the majority’s focus on unfairness and injustice does not appear to embrace consideration of the public policy concerns — such as the cost impact on the retailers and the calculation and remittance of the sales taxes on e-commerce sales with different state rules and rates.[32]


The Wayfair decision is a significant one. It overturns over two decades of precedent that had prohibited tax laws that impose sales and use tax obligations on remote sellers that lack a physical presence in the state. This decision will clearly impact many retailers that sell products in other states, and the consumers they serve. Further, although this decision did put to bed the physical-presence requirement, it still leaves certain questions unanswered for another day. Those questions regard the Commerce Clause and any due-process limitations on a state’s ability to tax those whose connection to the state is based on availing themselves of that state’s consumer base and whether Congress will address potential issues supposedly left in its province.


Howard K. Jeruchimowitz is a shareholder of Greenberg Traurig, LLP. His litigation practice emphasizes real estate litigation — including landlord-tenant, shopping center, mechanics lien, foreclosure and construction disputes, on behalf of shopping center owners, developers, managers, lenders and tenants. Mr. Jeruchimowitz serves on the board of editors of Shopping Center Law & Strategy, for which he has authored numerous articles He is also a roundtable leader and seminar speaker at ICSC law conferences. He is a subcommittee chairperson for emerging issues on the ABA’s Real Estate Litigation & Condemnation Committee. Mr. Jeruchimowitz has been recognized as a Leading Lawyer and profiled in the January 2016 issue of Leading Lawyers magazine, for the real estate, construction and environmental edition.

[1] 138 S. Ct. at 2089-91.

[2] Id. at 2091 (citing Complete Auto Transit, Inc., v. Brady, 430 U.S. 274, 279 (1977)).

[3] Id.

[4] Id.

[5] Id.

[6] Id at 2094.

[7] Id.

[8] Id. at 2095 (citations omitted).

[9] Id. at 2095-96.

[10] Id. at 2096.

[11] Id. at 2098.

[12] Id.

[13] Id. at 2099.

[14] Id.

[15] Id.

[16] 138 S. Ct. at 2100.

[17] Id. (citation omitted).

[18] Id.

[19] Id.

[20] Id.

[21] Id.

[22] Id.

[23] Id. at 2100-01.

[24] Id at 2101.

[25] Id. (citation omitted).

[26] Id.

[27] Id. at 2102.

[28] Id.

[29] Id. at 2012-2103.

[30] Id. at 2103.

[31] Id.

[32] Id.