How South Dakota vs. Wayfair Could Change Your Sales Tax Process

On Friday, January 12, 2018, the U.S. Supreme Court agreed to hear a case that will revisit states’ tax authority over out-of-state retailers. The outcome of this case could affect not only how major retailers such as Wayfair,, and Amazon, collect sales tax from customers for online sales, but also how all businesses will be required to treat out-of-state sales. On April 17, 2018 South Dakota v. Wayfair, Inc. was the first sales tax nexus case to be heard by the U.S. Supreme Court since the 1992 decision in Quill, which held that a taxpayer must be “physically present” in a state before that state could require the business to collect and remit sales and use tax.

The explosion of ecommerce in the last sixteen years combined with the states’ strong desire to tap into those sales to increase revenue have caused states to challenge the requirement of physical presence – a nexus requirement that is unique to sales tax. Currently, all but five states impose a sales tax, meaning the magnitude of this case reaches much of the nation. States like Texas, which is expecting more than 25% of its total revenue in 2018 to come from sales taxes, will see a major impact if the Court allows taxation of sales from retailers with no physical presence in the state. For retailers, an overruling of Quill could mean they will be required to register, collect, and remit sales tax in states where sales are made, regardless of where their facilities, property, or employees are located.


Should the Court repeal Quill’s sales-tax only, physical-presence requirement?


The Commerce Clause grants “exclusive authority [to] Congress to regulate trade between the State[s].”[1] The Commerce Clause prohibits a state from requiring online retailers to collect sales tax on sales into the state unless the retailer is “physically present” there.[2]


Generally, any persons making a sale of tangible personal property or services in South Dakota are obligated to collect and remit sales tax on each transaction. However, pursuant to Quill v. North Dakota[3], sellers must only collect and remit taxes on all in-state sales where the company has “physical presence.”[4] As further defined in Direct Marketing Association v. Brohl, “physical presence” is found when sellers maintain an in-state office, or any other place of business; has an agent or other type of representative within the state; owns any tangible personal property, real, or personal property within the state; or has telephone listings within the state and has advertised its merchandise for sale through newspapers, billboards, radio, or television. If the only contacts with the state are by mail or common carrier, the seller cannot be required to collect and remit sales tax to the state.

On March 22, 2016, South Dakota passed a Senate Bill[5], which provided that remote sellers of property in South Dakota without a physical presence in the state shall remit sales tax according to the same procedures as sellers with a physical presence. Id. The Bill limited this obligation to remote sellers with gross revenue of sales[6] delivered into South Dakota that exceeds $100,000 and/or remote sellers with two hundred (200) or more separate transactions in the state. Id. This Bill was passed in contradiction to Quill and took effect May 1, 2016, when the state began seeking judgments against remote sellers. The South Dakota Department of Revenue began issuing written notices to the sellers like Wayfair,, and Newegg, that it believed met the requirements of the Senate Bill 106.[7] The notices advised the sellers to register for South Dakota sales tax licenses by a given deadline, and failure to do so could result in a declaratory judgment action as authorized by law. Id. The sellers did not register for sales tax licenses and the State filed declaratory judgments against the sellers on April 28, 2016.

The case was removed to the South Dakota circuit court in January 2017, after which the sellers filed a joint answer and a statement of material facts admitting: each lacked a physical presence in South Dakota; each met the sales and transactions requirements for application of Senate Bill 106; and none were registered to collect South Dakota sales tax. Id. As an affirmative defense the sellers argued, based on Bellas Hess and Quill, Senate Bill 106 was unconstitutional under the Commerce Clause[8] and due to the lack of physical nexus founded on Supreme Court precedence, the state is prohibited from collecting tax from remote sellers with no physical nexus in the state. The state granted the sellers’ motion for summary judgement and the state appealed, arguing that the Supreme Court should reconsider Quill. The state argues that Quill should be reexamined based on the technological advancements that have evolved the retail industry, and it should no longer be the controlling precedent on the issue of the Commerce Clause limitations on interstate collections of sales and use taxes. Id. The state’s appeal was heard on April 17, 2018 with an estimated ruling in June.

Types of Nexus

The nexus South Dakota is attempting to enforce is a form of economic nexus, referred to as a “factor presence” standard. It creates a requirement based on either a predetermined level of sales of gross receipts or a minimum number of separate transactions in the state. If upheld, it is unclear if only this type of nexus will stand or if other approaches by states can be enforced as well.

Various nexus requirements adopted by other states:

Economic Nexus

Pure economic nexus focuses solely on a predetermined level of sales of gross receipts tax rather than the physical presence. Few states have enacted economic nexus.

New York Style “Click-through” Nexus

In 2008, New York expanded the definition of nexus to include any out-of-state seller who “enters into an agreement with a resident under which the resident…directly or indirectly refers potential customers…to seller” and such sales exceeds $10,000 per year.[9] The out-of-state seller is presumed to be a vendor if they enter into an agreement with a New York resident and the resident then refers customers to the vendor’s website. New York was the first to enact an agency sales tax nexus, that stated active in-state solicitation by non-employees that produces a significant amount of revenue qualifies as nexus.[10]

Affiliate Nexus

In addition to “click-through” nexus, New York, and approximately 20 other states have enacted analogous legislation stating that out-of-state retailer’s relationships with related parties/affiliates within the taxing jurisdiction create sufficient nexus in the state to require the retailer to collect and remit sales and use taxes on taxable sales.[11]

Marketplace Nexus

Marketplace nexus is the least commonly used. If a company with an in-state physical presence offers a service for third-party merchants by providing a primary contact point for customer service, payment processing services, or providing or controlling the fulfillment process, the third-party will be imputed with physical presence in the state and considered a retailer making sales subject to tax.[12]

Reporting Requirements

In 2010, Colorado enacted a statute requiring non-collecting retailers to provide Colorado purchasers a “transactional notice” at the time of purchase; provide an “annual purchase summary” with the dates, amounts and categories of purchases of all Colorado purchasers with purchase over $500; and file with the Colorado Department of Revenue an annual report listing their customers’ names, addresses and total purchase.[13] Other states have enacted similar reporting and notice requirements, however, since the enactment of the statute, numerous court challenges have risen due to privacy concerns relating to the annual purchase summary.


If upheld, the South Dakota bill would create a dramatic shift in sales tax requirements of sellers. An overturning of Quill could create a massive overhaul to determine and quantify sales tax requirements moving forward. Remote retailers could potentially be required to register, collect, and remit sales tax in states where sales are made, regardless of physical presence. Even companies that primarily make nontaxable sales – manufacturing, resale, etc. – could be required to register and collect certificates to support their untaxed sales and would be subject to audits in the various states to which they ship. Mid-sized companies would bear the largest burden of an overturning of Quill as large corporations are already collecting and filing in most states and small retailers would likely fall under the minimum requirements.

The consequences of the physical presence standard have always been significant and have been steadily increasing in the last ten years as we have seen a huge shift in how consumers purchase goods. For this reason, states have begun adopting nexus standards that focus on requirements other than physical presence to circumvent Quill, and profit from e-commerce becoming the preferred way of shopping with more than half of the population.[14]

Lila Disque, deputy general counsel for the Multistate Tax Commission, told Bloomberg Tax she finds it unlikely that the court would grant review in a case just to re-emphasize a previous decision like Quill.[15] “They generally grant cert with an eye toward overturning or distinguishing a case,” Disque said. Id. “I suspect the most likely conclusion is that the court will find that a Commerce Clause physical presence standard is no longer sensible, and South Dakota’s factor-presence standard is reasonable.” Id.

Numerous justices have expressed the negative impacts that Quill has on state departments in addition to the inherent benefit states will receive from effectively collecting sales tax from online purchasing. A change like this will cast a heavy burden on retailers and consumers alike, but states seek to gain a massive benefit from the revenue.


Please contact us if you have any questions or concerns about how this may affect you.




[1] U.S. Const. art. I, § 8, cl. 3.

[2] National Bellas Hess v. Department of Revenue, 386 U.S. 753 (1967).

[3] Quill Corp. v. North Dakota, 504 U.S. 298 (1992); National Bellas Hess v. Department of Revenue, 386 U.S. 753 (1967); State v. Wayfair Inc., 2017 SD 56 (2017).

[4] Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

[5] S.B. 106

[6] Sale includes tangible personal property, any products transferred electronically, or services.

[7] State v. Wayfair Inc., 2017 SD 56 (2017).

[8] Clause states: United States Congress shall have the power to regulate commerce with foreign nations, and among the several States, and with the Indian Tribes.

[9] N.Y. Tax Law § 1101(b)(8)(vi). The statute expanded the definition to contain a rebuttable presumption of nexus.

[10] Id.;, Inc. v. New York State Dep’t of Taxation & Fin., 987 N.E.2d 621 (N.Y. 2013).

[11] N.Y. Tax Law § 1101(b)(8)(i)(l)

[12] AZ TPR 16-3 (September 20, 2016)

[13] Colo. Rev. State § 39-21112(3.5)


[15] Ryan Prete, How Will High Court Rule in Online Tax Case? ‘Anyone’s Guess’,, (Jan 16, 2018).