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Out-of-State Sellers Without Physical Presence In State Could Be Required To Collect and Remit State’s Sales Tax - United States Supreme Court Overrules National Bellas Hess and Quill decisions in South Dakota v. Wayfair, Inc.

Client Advisory

June 26, 2018

In a decision long awaited by online sellers, the United States Supreme Court, in South Dakota v. Wayfair, Inc., overruled the “physical presence” sales tax nexus requirement that it established in its 1967 National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753, decision and reaffirmed (under the Constitution’s Commerce Clause) in its 1992 Quill Corp. v. North Dakota, 504 U.S. 298, decision.[1] In Wayfair, the Court held that the Commerce Clause does not require a business to have a physical presence in a taxing state to meet the substantial nexus test of Complete Auto Transit, Inc. v. Brody, 430 U.S. 274 (1977).[2]

Except for Alaska, Delaware, Montana, New Hampshire and Oregon, all states (and many localities) and the District of Columbia impose a sales tax. As a complement to the sales tax, these states and localities typically impose a use tax on purchasers of taxable items on which no sales tax has been paid. From a collections perspective, as studies and experience have shown, states have a far more difficult time, and collect far less tax revenue, trying to collect use taxes from purchasers, rather than compelling sellers to collect sales taxes from their purchasers and remitting these collected taxes to the state. The difficulty of collecting use tax was of central concern in Wayfair and predecessor cases. As the majority opinion in Wayfair points out, this inherent difficulty essentially gives out-of-state sellers a price advantage (i.e., the foregone sales tax) over in-state (including brick-and-mortar) sellers, at the cost of billions of dollars of foregone tax revenues – not to mention lost employment, retail activity, etc. – to states and localities.

In recent years, states have sought to expand their ability to tax out-of-state sellers, particularly after the Supreme Court’s unanimous 2015 decision in Direct Marketing v. Brohl, 135 U.S. 1124, upholding Colorado's remote-seller notice and reporting requirements, which applied irrespective of physical presence. In his concurring opinion in that decision, Justice Anthony Kennedy noted that “[t]here is a powerful case to be made that a retailer doing extensive business within a state has a sufficiently 'substantial nexus' to justify imposing some minor tax-collection duty, even if that business is done through mail or the Internet.”

The South Dakota law at issue in Wayfair imposes sales tax collection and remittance obligations on out-of-state sellers that, on an annual basis, deliver more than $100,000 of goods or services into South Dakota or engage in 200 or more separate transactions for the delivery of goods or services into South Dakota, even in the absence of any “physical presence” (e.g., employee, store or distribution site) in South Dakota.[3]

Going Forward

States will presumably respond to Wayfair by passing legislation that imposes sales tax collection and remittance requirements on the in-state sales of out-of-state sellers with no “physical presence” in the state. A number of states already have legislation imposing notice and reporting requirements on out-of-state sellers meeting certain taxable sales or transaction thresholds.[4]

Although Wayfair found physical presence to be unnecessary to satisfy the Constitution’s Commerce Clause nexus test, state and local tax laws will still need to establish nexus under Complete Auto Transit (as the Court found South Dakota’s law did in Wayfair). It remains to be determined how tenuous an out of state seller’s connections with a state can be, while constituting “substantial nexus.” For example, must (a) the legislation require minimum business or transaction (or some other kind of) thresholds, including whether such thresholds may be lower than South Dakota’s; (b) the legislation not be retroactive, as is the case with South Dakota’s; and/or (c) the state be a member of the Streamlined Sales and Use Tax Agreement (as is South Dakota), which reduces administrative and compliance costs for taxpayers and provides state-funded sales tax administration software?

Another question is whether Congress might step in and enact legislation addressing states’ ability to collect sales taxes from out-of-state sellers, which Congress would be constitutionally permitted to do, but has not yet done despite considering a number of proposals.


For more information concerning the matters discussed in this publication, please contact Marc Kushner (212) 238-8766, kushner@clm.com, Jennifer MacDonald (212) 238-8751; macdonald@clm.com, or your regular Carter Ledyard attorney.


[1] However, Quill did overrule National Bellas Hess’s holding that physical presence was also required to meet the Constitution’s Due Process Clause.

[2] Wayfair re-affirmed the four-prong Commerce Clause nexus test of Complete Auto Transit, under which a state tax will be upheld if it (1) applies to an activity with 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 provides.

[3] The South Dakota law applies prospectively, not retroactively, and was not to take effect until the law’s constitutionality was clearly established.

[4] In the past few years, Amazon began collecting sales taxes for sales made in a number of states and by April 1, 2017 Amazon had a policy of collecting sales tax on sales made in all 45 states imposing a statewide sales tax (although not on third party vendor sales).



Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2020 Carter Ledyard & Milburn LLP.
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