For over a generation, two Supreme Court decisions that essential predate the internet age has set a bright line rule that a state may not tax out of state retailers without a physical presence in the state. National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753 (1967); Quill Corp. v. North Dakota, 504 U. S. 298 (1992).
South Dakota Challenges Quill
Hoping to force a Supreme Court challenge, the State of South Dakota passed a law providing for out-of-state retailers to pay sales tax if: (i) they deliver more than $100,000 in goods or services into the state annually or (ii) engage in 200 or more separate transactions for the delivery of goods or services into the state. The South Dakota legislation stayed enforcement until the constitutionality of the law has been clearly established.
Justice Kennedy Reverses
When the Supreme Court last addressed this issue in 2015, Justice Kennedy indicated that this rule was ripe to be revisited. Today, he upheld the South Dakota law reversing Quill in a 5-4 decision in South Dakota v Wayfair, Inc.. Kennedy said that the physical presence rule
produces an incentive to avoid physical presence in multiple States. Distortions caused by the desire of businesses to avoid tax collection means that the market may currently lack storefronts, distribution points, and employment centers that otherwise would be efficient or desirable. The Commerce Clause must not prefer interstate commerce only to the point where a merchant physically crosses state borders. Rejecting the physical presence rule is necessary to ensure that artificial competitive advantages are not created by this Court’s precedents.
. . . . In the name of federalism and free markets, Quill does harm to both. The physical presence rule it defines has limited States’ ability to seek long-term prosperity and has prevented market participants from competing on an even playing field.
The Court then applied a more flexible nexus standard of whether the merchant had availed itself of the “‘substantial privilege of carrying on business’ in that jurisdiction.” The high thresholds established by the South Dakota law made it clear that it applied only if “the seller availed itself of the substantial privilege of carrying on business in South Dakota.”
Chief Justice Roberts wrote the dissent which did not entirely disagree that the Quill rule had a distortive effect.
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.
The Taxman Cometh?
The decision may not have an immediate effect in many states since it will require each state to enact legislation consistent with the nexus standard. In many cases, however, state legislatures have already adjourned for the year as the map below from the National Conference of State Legislatures indicates. So it may not be until next year that states begin to see the $8 -$33 billion per year believed to be lost due to the Quill standard.
The “Amazon Tax” War is Over
The ruling brings to a close the decade-long “Amazon tax” battle that began with New York’s 2008 affiliate marketing nexus tax and pitted states and brick and mortar retailers against Amazon and other e-commerce giants. Ironically, Amazon may be one of the winners since it has been paying sales tax in all fifty states for over a year and this ruling will eliminate any advantage retailers without a presence in fifty states might have had under Quill.