Insight: ‘South Dakota v. Wayfair': How We Got Here, Where We’re Going

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South Dakota v. Wayfair, the much-anticipated digital sales tax case challenging the physical-presence standard, is set for oral argument April 17. In this article, Nelson Mullins Riley & Scarborough LLP’s David Quam discusses the history and future of the case.

David Quam

By David Quam

David Quam is a partner in the Washington, D.C., office of Nelson Mullins Riley & Scarborough LLP, and the former deputy director of the National Governors Association. Quam provides clients with coordinated state and federal policy solutions, strategy, and representation on a wide array of issues including budgeting and tax.

On April 17, the U.S. Supreme Court will hear arguments in a case likely to end the internet’s reign as a sales-tax-free zone. The case is South Dakota v. Wayfair, and the question presented is whether the Supreme Court will recognize that the internet has fundamentally changed the nature of commerce and allow states to collect the taxes they are owed for online sales.

How Did We Get Here?

In 1992, the U.S. Supreme Court was faced with the question of when could a state require an out-of-state mail order company to collect and remit sales taxes on sales to customers in the taxing state. Known as the Quill case, the court drew on previous decisions to conclude that state sales tax requirements were too complex and burdensome to require any business other than one physically present in a state to collect sales taxes from out-of-state customers.

To the consumer, this decision meant that purchases from out-of-state vendors appeared to be tax-free since no sales tax was charged. (In reality, the responsibility for collecting the tax simply shifted from the seller to the consumer who was supposed to pay the tax to their state, something consumers rarely do.) To brick-and-mortar stores Quill meant a competitive disadvantage because they had to charge more for the same product than their out-of-state competitor. And for states and localities, this meant lost revenues—taxes that were owed but could not effectively be collected.

Fast forward 25 years. The internet, in its infancy in 1992, has completely remade commerce and exacerbated every consequence created by Quill. Last year, consumers’ online purchases accounted for more than 13 percent, or $453 billion, of all retail sales and 49 percent of retail sales growth. Remote sellers have a distinct advantage over their brick-and-mortar counterparts, and states and localities lose more than $20 billion annually.

The legal question before the Supreme Court in Wayfair is the same as in Quill. The context in which the question arises, however, is very different and supports a different outcome.

States and Congress

States did not sit idly by following Quill. The court in Quill had recognized that its new rule was “artificial at its edges,” creating differences between retailers based solely on their location or the number of people in a state. In fact, the court appeared to avoid having to solve the discrepancy physical presence creates by telling the legislative branch that Congress was “free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes.” To states, this meant that if states could mitigate some of the complexities of compliance, Congress could grant them the authority to collect sales taxes from all sellers.

States began by authoring the Streamlined Sales and Use Tax Agreement, a deal between businesses and states to encourage collection of sales taxes in return for simpler laws and regulations. By most accounts, the effort was a success. Today, the 24 states in compliance with the agreement collect millions annually from more than 3,600 volunteer companies.

But a voluntary system was only part of the solution. States needed Congress to bless their work and make it mandatory— only then would the playing field be level for all retailers.

With the encouragement of states and brick and mortar sellers, Congress has authored a number of bills since 2001 to address the inequality created by Quill. Ultimately, however, fears of being tagged as the politician who “taxed the internet” have outweighed common sense or the idea of letting the market, rather than accidental tax policy, determine winners and losers. Congress has proved to be a dead end.

Frustrated by congressional inaction, states began to take matters into their own hands. In 2008, New York pioneered what became known as the “Amazon tax” or “click-through nexus” by creating nexus for our-of-state vendors through their use of in-state, click-through advertisements. Other states implemented new notification and reporting requirements or innovative nexus laws—all designed to lessen the impact of Quill on state and local taxation. These efforts, upheld in court, met with varying degrees of revenue collection success, but none fully addressed the problems of Quill.

Then in March 2015, Justice Anthony M. Kennedy issued a new invitation in Direct Marketing Ass’n v. Brohl: “Given these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court’s holding in Quill.” South Dakota took Kennedy’s invitation and drafted a direct challenge to Quill. S.D. Codified Laws SS 10-64-1 et seq. (2016) requires out-of-state retailers to collect and remit sales and use tax if they annually conduct with South Dakota residents either (1) $100,000 worth of business, or (2) 200 separate transactions. Physical presence in the state is not required.

By design, the law directly contradicts Quill. The goal: get the case to the U.S. Supreme Court. Although unconventional, everyone seems to have been in on the act. The Legislature approved the bill, the governor signed it into law, and even the circuit court went along as indicated by its wink-and-a-nod ruling in the defendant’s favor because, “even when changing times and events clearly suggest a different outcome; it is simply not the role of a state circuit court to disregard a ruling from the United States Supreme Court.”

U.S. Supreme Court

What happens next is up to the nine justices on the U.S. Supreme Court. Many observers are encouraged that the court took the case and believe that even though the justices are usually reluctant to ignore precedent, especially those “that Congress has the power to overturn,” the court will overturn Quill. (Brief of the United States as Amicus Curiae supporting Petitioner) This opinion is further bolstered by the fact that the newest member of the court, Justice Neil M. Gorsuch, tipped his hand in his pre-Supreme Court Direct Mktg. Ass’n concurrence when he wrote, “ Quill’s very reasoning—its ratio decendi—seems deliberately designed to ensure that Bellas Hess’s precedential island would never expand but would, if anything, wash away with the tides of time.”

The question for practitioners now is what happens if the Supreme Court overturns Quill? How will states react?

While it is often a fool’s errand to try and predict how the court will rule, states are likely to fall into one of three camps if Quill is overturned. First, those states that are in compliance with the Streamlined Sales and Use Tax Agreement will move quickly and predictably toward a mandatory system based on the agreement’s rules and their state laws. Retailers that have been part of the voluntary system will see little change, and other retailers will have a well-trodden path to follow towards compliance in those jurisdictions.

The second group will consist of smaller, non-Streamlined states. These jurisdictions will likely mimic South Dakota’s law, establishing economic presence as the standard for “substantial nexus.” Again, the detail of the Supreme Court’s decision will be instructive for these states. They will lack some of the uniformity of the Streamlined states but will make every effort to meet the Supreme Court’s requirements.

The last group will include larger, non-Streamlined states with complex sales tax systems. States like California and New York may decide to make only minor changes to their laws while requiring out-of-state sellers to collect. If litigation ensues, as is to be expected after a Supreme Court decision of this magnitude, it will likely emerge from these states where complexity and economic impact are at their greatest.

As for Congress, look for it to continue its pattern of emitting smoke but no fire. A decision to overturn Quill will fundamentally alter the political dynamic of this issue. States will no longer be asking permission, they will be protecting their authority and revenues, and members of Congress will be hard pressed to undue revenue gains from states that, unlike Congress, must balance their budgets.


It has been more than 25 years since Quill established the physical presence rule for requiring the collection of sales taxes. While Supreme Court precedent changes slowly, if at all, the economy can change quickly. The digital age has left Quill behind as a relic of an analogue world and physical economy. Look for the Supreme Court to take advantage of states’ persistence by recognizing that state authority can and should apply to our modern, 21st century economy.

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