On May 1, 2016, South Dakota became the first state to enact “pure” economic nexus provisions for sales and use tax purposes. In a direct challenge to the current physical presence requirement of Quill Corp. v. North Dakota, 504 U.S. 298 (1992), South Dakota enacted the law requiring sellers without a physical presence in South Dakota to collect South Dakota sales tax on sales into South Dakota if, in the previous or current calendar year, the seller’s sales into South Dakota exceeded $100,000 or the seller had 200 or more separate transactions into South Dakota. These provisions were intended to instigate litigation. South Dakota consequently brought suit against major online retailers Wayfair, Inc., Systemax, Inc., Overstock.com, Inc. and Newegg Inc. on April 28, 2016, in state court.
In the 1992 holding of Quill, the U.S. Supreme Court (the Court) affirmed its previous holding in National Bellas Hess v. Department of Revenue, 386 U.S. 753, 87 S.Ct. 1389 (1967) that the existence of a physical presence is necessary before a state or locality may impose a filing obligation or any duty to collect use tax on a remote vendor.
In September 2017, the South Dakota Supreme Court held in South Dakota v. Wayfair, Inc., et al., No. 32CIV16-000092 (S.D. 6th Cir. March 6, 2017) that the state was bound to follow Quill. Therefore, the new legislation imposing economic nexus standards on remote retailers was invalid in light of Quill’s physical presence requirement. In its holding, the court rejected the state’s arguments that the Quill physical presence standard is outdated in light of technological advances. The court stated “[h]owever persuasive the State’s arguments on the merits of revisiting the issue, Quill has not been overruled.” South Dakota petitioned for and was granted certiorari to the Court.
The Court has contemplated revisiting Quill for the past three years. Notably, in his concurrence with the majority opinion in Direct Marketing Association v. Brohl, 135 S.Ct. 1124 (2015), Justice Anthony Kennedy invited reconsideration of the Court’s holding in Quill. In addition, in a 10th Circuit concurring opinion, newly appointed Justice Neil Gorsuch wrote that Quill has an “expiration date” and that it “seems deliberately designed to […] wash away with the tides of time.”
Oral arguments are scheduled for April, and the Court is expected to reach a decision by June. The Court may either uphold Quill on the basis that Congress is better suited to deal with this long-standing issue through federal legislation, or it may overturn Quill on the basis that new avenues of commerce, particularly electronic commerce, have rendered the Quill physical presence requirement obsolete in a modern economy. More than a dozen states have enacted similar legislation to South Dakota, and the Court’s upcoming decision may expand the sales and use tax filing obligations and registrations requirements of many industries.
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