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An in-depth look at potential implications of revisiting Quill’s physical presence standard

Supreme Court may be ready to reconsider the decades-old physical presence nexus standard

​In the light of the Quill physical presence requirements, retailers are presented with unique challenges as states increasingly push the boundaries of traditional sales and use tax nexus.


​On January 12, 2018, the US Supreme Court (Court) granted certiorari in South Dakota v. Wayfair, Inc. et al.,1 a case challenging South Dakota’s anti-Quill sales tax nexus law. This significant development suggests that the Supreme Court may be ready to reconsider the decades-old physical presence nexus standard2 required in order for a state or locality to impose a sales or use tax collection responsibility upon a remote seller.

The progression of events in the last several years affecting the sales tax nexus standards applicable to out-of-state vendors was not unexpected given comments by Justice Kennedy in the Court’s 2015 decision in Direct Marketing Association (DMA) v. Brohl.3 In a concurring opinion, Justice Kennedy stated:

There is a powerful case to be made that a retailer doing extensive business within a State has a sufficiently “substantial nexus” to justify imposing some minor tax-collection duty, even if that business is done through mail or the Internet. After all, “interstate commerce may be required to pay its fair share of state taxes.” This argument has grown stronger, and the cause more urgent, with time. When the Court decided Quill, mail-order sales in the United States totaled $180 billion. But, in 1992, the Internet was in its infancy. By 2008, e-commerce sales alone totaled $3.16 trillion per year in the United States.

Given these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court’s holding in Quill. A case questionable even when decided, Quill now harms States to a degree far greater than could have been anticipated earlier. It should be left in place only if a powerful showing can be made that its rationale is still correct.

Oral arguments were heard on April 17, 2018, in the Wayfair case. While we cannot predict the outcome, the questions raised by the Justices during oral arguments may indicate that the decision whether to overturn or uphold Quill’s physical presence standard could be a close one.

Recent state legislation—pushing the limits of “physical presence”

Even prior to the developments in Wayfair, states have enacted laws in the last decade that have expanded the notion of what is “physical presence” nexus for purposes of imposing a sales and use tax collection (or notice) responsibility on out-of-state sellers. These laws have generally fallen into one of the following categories.

Click-through nexus: A rebuttable presumption of nexus exists that an out-of-state seller has nexus in the state if the out-of-state seller enters into an agreement with an in-state online advertiser, in which the advertiser is compensated on a commission or a per-click basis for referring potential customers to the out-of-state seller’s website.

Affiliate nexus: A presumption of nexus exists if the out-of-state seller is a member of an affiliated group of corporations and any parent or subsidiary in the affiliated group has nexus with the state.

Notification and information reporting: If a remote seller does not have nexus and does not collect and remit the sales tax, certain states require the remote seller to notify both the customers and the respective state department of revenue that the customer may have a use tax obligation for the taxable purchases the customer made. Penalties for failure to comply with these notification requirements can be substantial.

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Some states directly challenge Quill

As noted above, Justice Kennedy remarks in the 2015 DMA decision directly challenged the ongoing relevance of a physical presence nexus requirement for sales and use tax nexus purposes. Since then, more than 10 states have currently enacted sales and/or transaction-based economic nexus provisions imposing a sales and use tax collection duty on an out-of-state seller who makes retail sales of tangible personal property into the state if (1) the out-of-state seller’s retail sales exceed a certain monetary threshold set by the state or (2) the out-of-state seller reaches a certain number of transactions in one year as set by the state. The South Dakota law at the center of the Wayfair litigation is one such example.

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While the outcome of Wayfair (as well as how states or Congress may respond if Quill is overturned) cannot be predicted, it is important that taxpayers review their compliance and potential use tax reporting readiness given a decision is anticipated sometime before the end of the Court’s term in June 2018. Such considerations include:

  • What current systems and business models/processes will be affected by the potential outcome of the litigation.
  • Whether systems are in place to begin calculating and remitting sales tax if Quill is overturned or will new IT system implementation and/or expansion of current profile be required.
  • How current sales of products or services would be characterized for sales tax base purposes in relevant state (e.g., will adjustments need to be made in the item/product categories within the Enterprise Resource Planning (ERP)/accounting system?).
  • Whether the required customer data is available to determine how to properly source sales if a sales and use tax obligation is imposed.
  • Whether current financial statement positions have considered recent changes in state sales and use tax laws and regulations, such as click-through, affiliate, or economic nexus, as well as notification requirements.
  • In states with notification requirements, whether compliance with notification requirements, voluntarily registration, or another approach is appropriate
  • Whether the potential increased compliance burden makes outsourcing sales and uses tax compliance functions to a third-party cost-effective alternative.

If the physical presence requirement of Quill is overturned, the sales and use tax nexus landscape will dramatically change.

We anticipate that companies, large and small, may require significant changes to internal systems and processes. And even in the event that Quill is upheld, states may opt to enact informational notification requirements in an attempt to affect customer use tax compliance in this area and to increase the obligations and level of complexity upon no nexus, remote sellers. Under either outcome, a delay in addressing the outcome of Wayfair may result in additional costs and/or delays considering expedited and compressed solution timelines. Companies are encouraged to consult with their indirect tax advisers to review the many technical and logistical considerations that should be addressed prior to the outcome of Wayfair.

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Let's talk

While the concept of sales and use tax nexus has been reasonably straightforward to date in light of the Quill physical presence requirement, retailers are presented with unique challenges as states increasingly push the boundaries of traditional sales and use tax nexus concepts.

Deloitte has advised multiple companies through these recent legislative changes and understands the complexity of the challenges. Let’s talk about what this potential change means for your company.


Richard Heller, managing director, Deloitte Tax LLP, Parsippany, NJ, +1 973 602 4088

Stephanie Csan, managing director, Deloitte Tax LLP, Parsippany, NJ, +1 973 602 6435

Galina Philipovitch, managing director, Deloitte Tax LLP, San Jose, CA, +1 408 704 2456

Michael Bryan—WNT, managing director, Deloitte Tax LLP, Philadelphia, +1 215 977 7564

David Welliver, senior manager, Deloitte Tax LLP, Minneapolis, +1 612 659 2938

Stephanie Gilfeather, manager, Deloitte Tax LLP, San Francisco, CA, +1 415 783 7091

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View the related Multistate Tax alert

Potential implications of Supreme Court revisiting Quill’s physical presence standard

The February 2018 tax alert summarizes the common ways that states have expanded the notion of what is “physical presence” as well as the recent trend towards adoption of economic presence sales and use tax nexus thresholds. In addition, this alert will outline various compliance readiness considerations given a decision in Wayfair is anticipated in summer 2018.

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