Third Time’s A Charm: South Dakota v. Wayfair

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On June 21, 2018, the Supreme Court issued a monumental 5-4 decision in South Dakota v. Wayfair. The Court’s decision overturned decades of precedent, holding that the physical presence rule established by Quill Corp. v. North Dakota is “unsound and incorrect.”[1]What does this mean? Essentially, states are now permitted to require out-of-state sellers to collect sales tax from customers within their state borders whether or not they have a physical presence within the state. Consequently, Z Company, whose operations are exclusively located in State X and whose business is primarily based on e-commerce and internet sales, may now be required to collect and remit sales taxes to States A, B, C, D, etc.
In Quill Corp. v. North America,the Supreme Court confirmed the bright-line test articulated in a previous case, National Bellas Hess v. Department of Revenue,[2]and stated the following: “a vendor whose only connection with customers in a taxing state is by common carrier or the United States mail is free from state-imposed duties to collect sales and use taxes, because such a vendor lacks the substantial nexus with the taxing state required by the Commerce Clause . . . .”[3]

For the past 50-plus years, the economy and legal jurisprudence have operated and expanded with this bright-line test operating in the background. This, however, did not prevent many states from passing “kill Quill” laws in an effort to change the rules and have the Supreme Court revisit its decision in Quill. South Dakota passed Senate Bill 106 (the South Dakota version of a “kill Quill” law), which required sellers to remit sales taxes to the state whether or not they met the physical presence test. Wayfair, among other retailers, failed to register for sales tax licenses, and the state of South Dakota filed a declaratory judgment against the sellers in circuit court. After the circuit court ruled in favor of the retailers and appeals were filed, South Dakota v. Wayfair made its way to the Supreme Court. For a more thorough primer on Quill Corp. v. North Dakota and the main facts and points at issue in South Dakota v. Wayfair, see my previous article: A Battle of the Dakotas: South Dakota v. Wayfair.

The Majority

Justice Anthony Kennedy (who announced his retirement shortly after Wayfair was released) authored the majority opinion and was joined by Justice Thomas, Justice Ginsburg, Justice Alito, and Justice Gorsuch. According to the majority, the physical presence rule under Quillis incorrect, and both Quilland National Bellas Hess, Inc. v. Department of Revenue of Illinois are overruled.[4]

The majority placed great significance on current economic realities and the supposed inadequacies of the Court’s historical decisions. The majority stated in part:

The physical presence rule has long been criticized as giving out-of-state sellers an advantage. Each year, it becomes further removed from economic reality and results in significant revenue losses to the States. These critiques underscore that the rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause.[5]

Further, the majority used particularly strong language regarding their interpretation of the physical presence rule, suggesting that it was “a judicially created tax shelter” and “an extraordinary imposition by the Judiciary on States’ authority to collect taxes and perform critical public functions.”[6]Additionally, the Court emphasized the changes in the national economy:

The Internet revolution has made Quill’s [rule] . . . all the more egregious and harmful. The QuillCourt did not have before it the present realities of the interstate marketplace, where the Internet’s prevalence and power have changed the dynamics of the national economy. The expansion of e-commerce has also increased the revenue shortfall faced by States seeking to collect their sales and use taxes, leading the South Dakota Legislature to declare an emergency.[7]

These views, along with the shared criticisms of 41 states, two Territories, and the District of Columbia pushed the majority to break from over 50 years of judicial precedent (stare decisis) and eliminate the physical presence rule.

The Dissent

Chief Justice John Roberts authored the dissenting opinion and was joined by Justice Breyer, Justice Sotomayor, and Justice Kagan. Overall, the dissenting opinion articulated a few main concerns with the majority’s rationale based on the same facts. For example, Justice Roberts notes that the “Internet’s prevalence and power have changed the dynamics of the national economy” is precisely why the physical presence rule should not be discarded.[8]In particular, the dissent noted its concern that any significant changes to the current rules should be left to Congress:

Any alternation to [the backdrop of established rules, including the physical-presence rule] . . . with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress. The Court should not act on this important question of current economic policy, solely to expiate a mistake it made over 50 years ago. . . . the “very fact” of Congress’s superior authority in this realm “g[a]ve us pause and counsel[ed] withholding our hand. . . . “the better part of both wisdom and valor [may be] to respect the judgment of the other branches of the Government.”[9]

Further, while the dissent noted that Congress was more properly equipped to handle a change in the established rules, it also noted that overturning Quillwould damage Congress’s work on the same issue—“Nothing in today’s decision precludes Congress from continuing to seek a legislative solution. But by suddenly changing the ground rules, the Court may have waylaid Congress’s consideration of the issue.”[10]

Moreover, the economic picture painted by the majority is not the total truth:

States and local governments are already able to collect approximately 80 percent of the tax revenue that would be available if there were no physical-presence rule. . . . The Court, for example, breezily disregards the costs that its cession will impose on retailers. Correctly calculating and remitting sales taxes on all e-commerce sales will likely prove baffling for many retailers. . . . The burden will fall disproportionately on small businesses. . . . The Court’s decision today will surely have the effect of dampening opportunities for commerce in a broad range of new markets.[11]

Consequently, the dissent’s opinion disagreed with the elimination of the physical-presence rule for purposes of collecting sales taxes because doing so would usurp the role of Congress and weigh disproportionately on small businesses, not the states.


Overall, the Court’s decision in South Dakota v. Wayfair is intriguing. In one sense, the Court was split on whether the Court should abandon over 50 years of precedent and the current physical-presence regime. In another sense, the divided Court found that businesses and the States would be affected differently by a change to the physical-presence rule—the majority believed the current regime disproportionately affected in-state “brick and mortar” businesses and the coffers of the states; the dissent believed a change to the regime would disproportionately affect out-of-state business, and the states would be fine. It will remain to be seen how much businesses, particularly small businesses in the sharing economy, will be affected by the change to the physical-presence test. In the meantime, businesses will need to take the necessary steps to comply with state sales tax laws until Congress decides to act, assuming it ever does.


[1]585 U.S. ___ (2018).

[2]386 U.S. 753 (1967).

[3]Quill, 504 U.S. at 301.

[4]386 U.S. 753 (1967).

[5]585 U.S. ___ (2018).



[8]Id.(Roberts, C.J., dissenting).

[9]Id.(citing Quill Corp. v. North Dakota, 504 U.S. 298, 318-19 (1992).

[10]South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018) (Roberts, C.J., dissenting).



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