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May 24, 2018 At Court

Wayfair, Quill & The Physical Presence Test: Bright-Line Standard Or Diminished Relevance Paradox

By Jeffrey Krasney, Attorney at Law, Pennsylvania and Washington, DC

On April 17, 2018, the U.S. Supreme Court heard oral arguments in the Wayfair case.1 The case addresses the taxation of online sales—that is, the physical presence nexus test or the manner in which sales taxes are applied to online retail activity.

In 1992, the Supreme Court in Quill2 reaffirmed the “physical presence” standard, noting that Bella Hess3 required some sort of physical presence within the state.4

In Bellas Hess, the Court suggested that physical presence was not only sufficient for jurisdiction under the Due Process Clause, but also necessary.5

The Due Process Clause “requires some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.”6 Further, the “income attributed to the State for tax purposes must be rationally related to values connected with the taxing State.”7 Thus, a state could only require a business with a physical presence in the state to collect and remit sales tax.8 In other words, businesses which did not have a sufficient nexus were not required to collect or remit a tax. Justice Stevens in Quill stated that taxing out-of-state businesses would “unduly burden interstate commerce”9 and added that a bright-line rule under which states can collect state taxes only from retailers with a physical presence in the states “encourages settled expectations and, in doing so, fosters investment by businesses and individuals.”10

According to the Supreme Court, one of the goals of the Dormant Commerce Clause was to “avoid the tendencies toward economic Balkanization that hindered, and suppressed interstate commerce for the ... States under the Articles of Confederation.”11 The Dormant Commerce Clause doctrine was viewed as promoting the development of a truly national economy (rather than prohibiting states from discriminating against cross-border businesses).

Quill was decided prior to the emergence, development and growth of e-commerce and online retailers. Traditional ‘brick and mortar’ retailers and sellers now argue that they are at a competitive disadvantage by collecting sales taxes when online businesses need not do so. As a result of e-commerce and online sales, states are also generally missing out on sales taxes owed to them—potentially losing billions of dollars annually in revenue.

Some Justices have suggested that it may be time to re-think the Quill conclusion. In a 2015 Colorado case that challenged the use tax reporting requirements, Justice Kennedy concluded that the combination of tax losses from individual purchase use tax non-compliance and the far-reaching systemic and structural changes in the economic and social activities wrought by expanding internet use were indicative of a potential need to revisit Quill’s physical presence test.12 Justice Kennedy essentially invited the states to provide the Court with an appropriate case to decide whether the physical presence nexus basis which the Court found suitable in 1992 remains viable today.13

Using Justice Kennedy’s concurrence as a stratagem, a number of states have sought to challenge the Quill physical presence nexus standard.14 In 2016, South Dakota created an economic nexus law that taxes most goods and services delivered in the state.15 Specifically, the new economic nexus law requires out-of-state sellers who (i) have gross revenue from sales of tangible property, digital property transfers, or services in South Dakota exceeding $100,000 or (ii) engage in 200 or more separate transactions in tangible property, electronic product transfers, or services delivered within the state, to collect and remit South Dakota sales and use tax.

The new nexus law was challenged, resulting in an opinion by the South Dakota Supreme Court that applied Quill to hold that the new law inappropriately extended the scope of South Dakota’s taxing power.16   South Dakota sought a writ of certiorari to challenge the Quill physical presence standard. That case is now before the Supreme Court, and thus gives the Court an opportunity to clarify the administration and collection of state taxes as well as to offer guidance on any continuing limitations of a state’s power to tax online retailers under the Dormant Commerce Clause.17

Prior to the oral arguments in the Wayfair case on April 17, 2018, at least three Justices (Kennedy, Thomas and Gorsuch) appeared inclined to reassess Quill. Nonetheless, the arguments revealed, through a series of incisive questions, considerable trepidation about overruling the precedent. By the conclusion of the arguments, it was not at all clear how a majority of the Justices would rule.

For instance, Justice Sotomayor raised her “concern about the unanswered questions that overturning precedents will create” as well as unforeseen consequences not anticipated, if the Court were to overturn a precedent such as Quill.18 She listed various reservations, including “retroactive tax liability;”19 and questions such as “what happens when the tax programs break down?” “how much contact is enough (by a remote seller) to justify (requiring sales tax collection) on an out-of-state seller?” and “what happens when states and merchants cannot keep track of who received their goods?”20 “All of these questions are wrought with difficulties,” she noted.21

Another spirited exchange occurred as Justices Kagan, Roberts and Breyer expressed concern that overturning Quill might be inappropriate when Congress had not chosen to act. Congress is well aware that the change in landscape has been significant. Justice Kagan declared it “a very prominent issue which Congress has been aware of for a very long time and has chosen not to do something about that.”22 “Congress,” she noted, “is capable of crafting compromises and trying to figure out how to balance the wide range of interests involved here.”23 “Congress … can craft a compromise in ways that we cannot.”24

Justice Breyer continued the theme, noting that “Congress was about to act. And indeed, what stopped them from acting was our decision to decide this case.”25 He suggested that the fifty states should have the power to get Congress to act.26 Chief Justice Roberts wondered, though, whether the state sales tax issue was “a problem that has ‘peaked’.” If so, perhaps leaving Quill in place would be the best solution.27

When Justice Kennedy asked what difference it made for the Court whether Quill was correctly or incorrectly decided,28 George S. Isaacson, a lawyer representing Wayfair and other online merchants, argued the “value in settled expectations and standing by the decision.”29 Isaacson relied on former Justice Scalia’s concurrence in Quill, in which he argued that stare decisis is most important where Congress can address an issue.30 Isaacson concluded his response with a strong claim that “stare decisis is not dependent upon the correctness of the decision. In fact, if a decision is correct, (then) stare decisis isn’t necessary.31

The questions and responses in the oral argument may well influence the Justices in deciding the Wayfair case. These are dynamic issues in a still-changing field. Congress’s clear awareness of the changed technological situation, Congress’s potential ability to craft a compromise in a way that the Supreme Court cannot, and the oft disregarded but sometimes emphasized doctrine of stare decisis – all raise highly consequential issues.

If the Court does not act, it is not clear whether state actions, laws, and subsequent challenges will be sufficient to spur Congress to enact legislation, under the threat that states across the country may respond to judicial and congressional inaction by enacting their own laws subjecting remote sellers to collection obligations. Such inconsistent standards are a primary reason for a Commerce Clause solution, since they engender fragmentation in compliance and enforcement and leave states and online merchants with many uncertainties. Yet it is clear that little, if any, progress has been made in Congress in spite of mounting pressure on the states due to loss of revenues from remote sellers’ ability to avoid collecting state taxes. Only the Marketplace Fairness Act of 2013 has garnered a Senate floor vote. Failure of the Supreme Court to act thus likely would ensure a continuing uncertain future for sales and use tax nexus.

The Supreme Court has two choices.  It may choose to overturn Quill, articulating a new nexus standard that covers online sales, or it may leave the current laws in place that exempt online merchants under the Quill precedent. Either way, Congress could develop its own solution to remote sales tax collection by overriding or affirming the Supreme Court.32 Perhaps the time is not yet ripe to write Quill’s epithet.

1 South Dakota v. Wayfair, Inc., No. 17-494 U.S. Sup. Ct (Apr.17, 2018).

2 Quill Corporation v. North Dakota, 504 U.S. 298 (1992).

3 National Bellas Hess v. Department of Revenue, 386 U.S. 753 (1967).

4 504 USat 307, 314, 316, 317.

5 Id. at 307.  Even while supporting the physical presence standard, Quill acknowledges that the Court has come to the opposite conclusion in other decisions.

[J]urisdiction … may not be avoided merely because the defendant did not physically enter the forum State. … [I]t is an inescapable fact of modern commercial life that a substantial amount of business is transacted solely by mail and wire communications across state lines, thus obviating the need for physical presence. … So long as a commercial actor’s efforts are ‘purposefully directed’ towards residents of another State, we have consistently rejected the notion that an absence of physical contacts can defeat personal jurisdiction there.

Burger King Corp. v. Rudzewicz, 471 U.S. 462, 476 (1985) (emphasis in original).

6 Miller Brothers Co. v. Maryland, 347 U.S. 340, 344-345 (1954).

7 Moorman Mfg. Co. v. Bair, 437 U.S. 267, 273 (1978) (citation omitted).

8 504 US at 308, 313. The Quill court noted that “a corporation may have the ‘minimum contacts’ with a taxing State as required by the Due Process Clause, and yet lack the ‘substantial nexus’ with that State as required by the Commerce Clause.” Id. at 333 n.7.

9 Id. at 313.

10 Id. at 316.

11 Id. at 312. The Framers intended the Commerce Clause as a cure for these structural ills. See generally The Federalist, Nos. 7, 11 (Alexander Hamilton).


The Supreme Court relied on stare decisis to reaffirm the physical presence requirement and to reject attempts to require a mail-order business to collect and pay use taxes. Quill Corp. v. North Dakota, 504U.S. 298, 311 (1992). This was despite the fact that under the more recent and refined test elaborated in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), "contemporary Commerce Clause jurisprudence might not dictate the same result" as the Court had reached in Bellas Hess. Quill Corp., 504 U.S. at 311. In other words, the Quill majority acknowledged the prospect that its conclusion was wrong when the case was decided.

Direct Marketing Association v. Brohl, 575 U.S. ___ (2015) (J. Kennedy, concurring).


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. See Pearson v. Callahan, 555 U.S. 223, 233 (2009) (stare decisis weakened where "experience has pointed up the precedent's shortcomings"). It should be left in place only if a powerful showing can be made that its rationale is still correct. Direct Marketing Association v. Brohl does not raise this issue in a manner appropriate for the Court to address it. It does provide, however, the means to note the importance of reconsidering doubtful authority. The legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess.


14 States that have addressed the economic sales and use tax through legislative or regulatory action include the following: Alabama, Indiana, Maine, Mississippi, North Dakota, Pennsylvania, South Dakota, Tennessee, Vermont, Washington and Wyoming.

15 South Dakota Senate Bill 106 (effective May 1, 2016).

16 The South Dakota Supreme Court issued its decision in South Dakota v. Wayfair, Inc. on Sept. 13, 2017, unanimously agreeing with a state circuit court decision.

17 The Dormant Commerce Clause recognizes congressional jurisdiction over interstate commerce. U.S. Constitution, Art. I § 8, cl.3. In Quill, Justice Stevens noted that the Court’s “interpretation of the ‘negative’ or ‘dormant’ Commerce Clause has evolved substantially over the years, particularly as that Clause concerns limitations on state taxation powers.” Quill, 504 US 298, 309.

18 Transcript of Oral Argument at 4, South Dakota v. Wayfair, No. 17-494 (U.S. Apr. 17, 2018) (statement of Sotomayor, J.).

19 Id.

20 Id. at 5.

21 Id.

22 Id. at 11 (statement of Kagan, J.).

23 Id. at 23.

24 Id. at 23 -24.

25 Id. at 13 (statement of Breyer, J.).

26 Id.

27 Id. at 17 (statement of Roberts, C.J.).

28 Id. at 43 (statement of Kennedy, J).

29 Id. at 43) (statement of Isaacson, arguing as Respondent).

30 Id. at 51.

31 Id. at 53.


This aspect of our decision is made easier by the fact that the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve. No matter how we evaluate the burdens that use taxes impose on interstate commerce, Congress remains free to disagree with our conclusions.

Quill, 504 US at 318.