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Potential taxpayer implications of the pending Wayfair ruling

Inside Deloitte

In this edition of Inside Deloitte, Rick Heller, Michael Bryan, David Welliver, and Stephanie Gilfeather consider the US Supreme Court’s recent decision to revisit the Quill physical presence nexus standard in Wayfair. They also consider some common ways that states have expanded the notion of what is a physical presence, the recent trend toward adoption of economic presence sales and use tax nexus thresholds, and various compliance readiness considerations are given that a court decision in Wayfair is anticipated this summer.


On January 12, the US Supreme Court granted certiorari in South Dakota v. Wayfair Inc.,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 for a state or locality to impose a sales or use tax collection responsibility on a remote seller.

In Quill, the court affirmed the existence of a bright-line physical presence standard for substantial nexus under the commerce clause before a state or locality may impose a duty to collect use tax on a remote vendor.3 In a direct challenge to the Quill physical presence requirement, South Dakota enacted legislation in 2016 (S.B. 106) providing that a seller—without a physical presence in the state—is required to collect sales tax if, in the previous or current calendar year, its sales exceed $100,000 or the seller has 200 or more separate transactions into South Dakota.4

Noting that “the inability to effectively collect the sales or use tax from remote sellers . . . is seriously eroding the sales tax base of [South Dakota], causing revenue losses and imminent harm to [South Dakota] through the loss of critical funding for state and local services,”5 S.B. 106 also authorizes the state to initiate a declaratory judgment action to provide the “most expeditious possible review of the constitutionality of this law”6—which it brought forth in a circuit court soon after the legislation’s enactment against several large online retailers.

The filing of this declaratory action by South Dakota on April 28, 2016, thus operated as an injunction during the pendency of the action, prohibiting any state entity from enforcing S.B. 106’s economic nexus collection provisions against taxpayers that do not affirmatively consent or otherwise voluntarily remit the sales tax for the period when its constitutionality is being challenged.7 If the constitutionality of those South Dakota nexus provisions is upheld and any injunction against the enforcement of this law is lifted, S.B. 106 provides that the state will assess and apply its economic nexus tax collection obligations “from that date forward with respect to any taxpayer covered by the injunction.”8

On September 13, the South Dakota Supreme Court affirmed the lower circuit court’s 2017 holding that struck down the law as unconstitutional in violation of the Quill physical presence standard, stating that “however persuasive the State’s arguments on the merits of revisiting the issue, Quill has not been overruled.”9

In the petition for writ of certiorari, South Dakota presented the single question whether the Supreme Court should “abrogate Quill’s sales tax-only, physical-presence requirement.”10 In granting certiorari, the court may be prepared to provide its view on the relevance of a physical presence sales and use tax nexus standard in a 21st-century e-commerce environment. Oral arguments before the Court are scheduled for April 17, and a decision is anticipated in late June.

Generally speaking, that pending challenge before the Court is not unexpected given comments by Justice Anthony M. Kennedy in the court’s 2015 decision in Direct Marketing Association v. Brohl.11 In a concurring opinion, 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.” [Citation omitted.] 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. [Citation omitted.] 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. [Citation omitted.]

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. [Citation omitted.] It should be left in place only if a powerful showing can be made that its rationale is still correct.12

Download the PDF to read the article in full.

​If you have questions regarding this edition of Inside Deloitte, please contact:

Rick Heller, managing director, Deloitte Tax LLP

Michael Bryan, managing director, Deloitte Tax LLP

David Welliver, senior manager, Deloitte Tax LLP

Stephanie Gilfeather, manager, Deloitte Tax LLP


1 South Dakota v. Wayfair Inc., 901 N.W.2d 754 (S.D. 2017), cert. granted US Jan. 12, 2018) (No. 17-494).

2 Quill Corp. v. North Dakota, 504 US 298 (1992).

3 Id.

4 S.B. 106, 2016 Legislative Assembly, Reg. Sess. (S.D. 2016), as codified under S.D. Codified Laws section 10-64-1 through section 10-64-8.

5 S.D. Codified Laws section 10-64-1.

6 S.D. Codified Laws section 10-64-3.

7 S.D. Codified Laws section 10-64-4.

8 S.D. Codified Laws section 10-64-7.

9 South Dakota v. Wayfair Inc., 901 N.W.2d 754 (S.D. 2017).

10 Petition for Writ of Certiorari, South Dakota v.Wayfair Inc.,901 N.W.2d 754 (S.D. 2017), cert. granted (US Jan. 12, 2018) (No. 17-494).

11 Direct Marketing Association v. Brohl, 135 S. Ct. 1124, 1134-35 (2015) (Kennedy, J. concurring).

12 Id.

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