Corporate Close-Up: ‘Kill Quill’—What the End of Quill Would Mean for Corporate Income Taxpayers

From SALT Talk Blog

By Mariam Ahmadi | March 5, 2018


Last week, South Dakota submitted its brief to the Supreme Court in its battle against online retailer Wayfair, asking for reconsideration of the longstanding Quill physical presence nexus standard for sales and use taxes. South Dakota argues for the abrogation of the 1992 decision, claiming it is “outdated and harmful.” According to the state, out-of-state retailers should pay their “fair share of taxes” in South Dakota; something it says they’re not currently required to do under Quill. Although Quill established a “bright-line” physical presence nexus standard in the context of sales and use taxes, a key constitutional question that remains unanswered is whether states must use Quill’s nexus standard when making corporate income tax nexus determinations.

According to Bloomberg Tax’s 17th Annual Survey of State Tax Departments, which covers a variety of topics, only four states currently apply Quill’s physical presence nexus standard to corporate income taxes. This multistate tax report polls senior state tax officials to clarify questions about how their jurisdictions treat grey areas of state taxation. One such grey area covered by the survey is corporate nexus. Be on the lookout for Bloomberg Tax’s 18th Annual Survey, scheduled for release on April 27 and available in both print and electronic format.

Over the last several decades, taxpayers have attempted to apply Quill’s nexus standard to corporate income taxes, while most states generally follow a standard based on the economic presence of a business in the state. Generally, the dormant commerce clause prohibits states from imposing taxes that might unduly burden interstate commerce unless there is substantial nexus to the taxing state; however, the application of Quill’s nexus standard to out-of-state businesses would prevent the taxation of such entities unless the entity has a physical presence within the state.

Delaware, Massachusetts, Pennsylvania, and Texas have all indicated in their responses to Bloomberg Tax’s Annual Survey that they may require out-of-state corporations to be physically present within their jurisdictions to trigger corporate income tax nexus.


In Delaware, a physical presence in the state is required before a corporation can be subject to corporate income tax. Taxpayers seeking to determine whether their activities in Delaware create nexus should check out the state’s nexus questionnaire


In Massachusetts, out-of-state corporations may request a determination from the state regarding whether the company is subject to tax. Though Massachusetts indicated in its survey response that it might follow Quill on corporate income or excise taxes, existing Massachusetts case law calls that position into question. In Geoffrey, Inc. v. Commissioner of Revenue, a Massachusetts court held that an out-of-state taxpayer that licensed intangible property in the state and derived income from those transactions has substantial nexus.


In Pennsylvania, an out-of-state corporation may be subject to corporate net income tax if the corporation, itself or through association, does business or solicits business within the state.  Taxpayers should be aware that carrying on activities such as solicitation otherwise protected under Pub. L. No. 86-272 (the Interstate Income Act of 1959) will not create nexus. Pennsylvania will also impose corporate net income tax if a taxpayer owns property, or is employing or using capital or property in the state.


In Texas, out-of-state corporations may be subject to the state’s franchise tax based on physical presence by a taxpayer or potentially on physical presence of certain taxpayer contractors or agents. A few of the activities that subject Taxpayers to franchise tax in Texas include: cosigning goods in the state; delivering sold items into Texas; having employees or representative in the state doing business of the taxable entity; and leasing tangible personal property used in the state. For a nonexhaustive list of activities that Texas deems to create nexus for net corporate income tax purposes, click here.

There is no doubt that the Supreme Court’s decision in Quill was pivotal. This standard has allowed out-of-state retailers to avoid collecting sales tax where they lack physical presence in the state. The Supreme Court’s review of Wayfair will directly address the issue of when states may tax online sales and, as a corollary, when states may impose income taxes on corporate taxpayers.

Wayfair is scheduled to submit its brief by March 28 and oral arguments before the Supreme Court are scheduled for April 17.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: How do you think states will respond to the potential repeal of Quill’s nexus standard?

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