If you’re doing business in more than one state, you’d best pay attention to a pending U.S. Supreme Court case entitled South Dakota v. Wayfair (2017 S.D. 56, 901 N.W.2d 754, cert. granted, U.S. S. Ct., Dkt. No. 17-494, 01/12/2018).  The outcome will either clarify or expand states’ rights to impose their sales or use taxes on out-of-state sellers.


Every state with a sales tax also has a complementary use tax.  The purpose of the use tax is to capture any transaction that normally would have been subject to sales tax but somehow escaped the tax, generally because the purchase was made from outside the taxing state.  Although the buyer is always considered the primary taxpayer for use tax purposes, in some cases a state’s agency may pursue either the buyer or the seller for the tax.

When sellers are required to collect an outside destination state’s tax, it’s generally use tax that’s involved.  That’s because the U.S. Constitution prohibits states from imposing sales tax on transactions that occur outside their borders.  Although use tax is imposed on the buyer, the state may impose a collection responsibility on any out-of-state seller that has a physical presence (called nexus) in the buyer’s state.

Nexus is the minimum level of connection requiring a business to register with a state and collect that state’s sales and use taxes.  In Quill Corporation v. North Dakota, 504 U.S. 298 (1992), the U.S. Supreme Court determined that a state may not assert nexus against a seller unless the seller has established a physical presence in the state that is “more than minimal.”  The court based its findings on the Commerce Clause of the U.S. Constitution, which has long been interpreted as prohibiting states from unduly burdening interstate commerce.  To date, Quill is the leading case regarding nexus issues.

Unfortunately, Quill didn’t delineate a clear cutoff point between a minimal and a “more than minimal” physical presence, which has resulted in the application of varied and sometimes conflicting nexus criteria from state to state.  The broad criteria for physical presence include owning or leasing in-state property (real or personal), and/or using in-state representatives (employees, independent contractors, or agents, whether resident or visiting). The nuances are legion.

For example: states have asserted (or attempted to assert) physical presence based on: relationships with in-state affiliates; advertising “aimed at” state residents; merchandise deliveries into the state by company-owned vehicles; conducting in-state seminars or trade shows; sales of gift cards in affiliated in-state stores; provision of after-sale services (such as repairs and maintenance) by employees or third parties; and selling property over the Internet through a website maintained by an in-state host.

Once a state determines that a seller has nexus (i.e., is “doing business” in the buyer’s state), it may assess the use tax against either the seller or the buyer.  Since it’s easier to pursue one seller than chase down each of the seller’s customers, the state goes after sellers whenever it can.  If the seller does not have nexus, however, the buyer is the only party that the state can legally assess.

When a firm is determined to be doing business within a state, it must register, obtain a sales tax permit, and collect and report the state’s sales and use taxes.  These taxes will be due on all sales into the state (including mail order and Internet sales, even when the property is shipped from outside the state) unless a separate exemption applies.  If the state learns that the business had nexus before its registration date, it will assess taxes, interest, and penalties on prior inbound sales as far back as its statute of limitations allows (limited, of course, by the date the nexus was first established).

The justices in the Quill case specifically ruled out economic presence as a basis for asserting nexus.  North Dakota, the assessing state in Quill, had unsuccessfully argued that nexus could be established solely through economic connections, based on the Due Process Clause of the U.S. Constitution.

Due Process Clause:

The Due Process Clause states that “No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.”

The clause’s relevance to tax issues arises from cases determining whether companies can be forced to defend themselves in the courts of a state other than their own.  According to the Supreme Court, a state can’t compel a company to appear and defend itself in the state’s courts unless the firm (1) has at least minimum contacts with the state; and (2) purposefully direct its sales activity into the state’s market place.  Such activity constitutes an economic but not a physical presence, which under present federal case law does not by itself establish nexus for sales and use tax purposes.

The Wayfair case

Ever since Quill was decided in 1992, the states have been trying to expand the definition of physical presence, sometimes successfully, sometimes not, and often in ways that strain credibility.  Businesses have frequently challenged these attempts in court, and both taxpayers and states have repeatedly tried to appeal their cases to the Supreme Court.  Until now, the Court has refused to grant review, generally pointing out that it’s up to Congress to enact clarifying or modifying legislation.

Since the Constitution grants Congress the sole power to regulate interstate commerce, the House and Senate are indeed the appropriate bodies to clarify or modify the criteria for nexus.  Such legislation has been introduced several times, only to suffer a lingering death in one chamber or the other.

In the face of ongoing congressional inaction, South Dakota decided to directly challenge the physical presence requirement by enacting S.B. 106 in March 2016.  This legislation (S.D. Codified Laws Sec. 10-64-2) requires out-of-state sellers lacking physical presence to register and collect use tax when, in the current or previous calendar year, either (a) their gross revenue from sales of taxable goods and services delivered into the state exceeds $100,000, or (b) they sell taxable goods and services into the state in 200 or more transactions.

After the law was enacted, the state sued four noncompliant out-of-state retailers.  One of the retailers chose to register and collect the tax; the other three (Wayfair Inc., Overstock, Inc., and Newegg, Inc.) moved for summary judgement, which South Dakota’s Supreme Court granted based on Quill.  To everyone’s surprise, in January 2017 the U.S. Supreme Court agreed to review the case, and on April 17, 2018, the Court heard oral arguments.

During oral argument, the Justices raised questions about compliance burdens, factual considerations (such as which types of sellers would benefit or suffer under the proposed changes, and what types of factual records could be relied upon to quantify such effects), the effects of changes wrought by technology subsequent to Quill, and the role Congress might play (if any) in addressing the various possible outcomes.  By the time the arguments concluded, there was no clear judicial consensus.


Although Supreme Court decisions tend to be consistent with the ideological positions of the Justices, the Wayfair issues don’t follow ideological lines.  The Court requires stronger than usual justification for overturning prior rulings like the Quill findings, but the Justices also appear sensitive to post-Quill changes in circumstances.

A decision is expected by the end of June 2018.  It’s impossible to predict the outcome of South Dakota v. Wayfair, but the effects are bound to be consequential.