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US Supreme Court Overturns Physical Presence Requirement

for Sales Tax Collections


Today, the United States Supreme Court announced its decision in South Dakota v. Wayfair, Inc. et al. which has overturned the Court's previous Commerce Clause nexus standard for sales tax requiring a physical presence in a state before that state could impose a sales tax collection obligation on remote sellers.


Over twenty-five (25) years ago, the United States Supreme Court ruled in Quill Corporation v. North Dakota, 504 U. S. 298, that a state could not impose a sales tax collection obligation unless the taxpayer has a physical presence in that state.  At that time the court re-examined the Court's earlier ruling in National Bellas Hess, Inc. v. Department of Revenue of Ill which established the physical presence requirement


The United States Supreme Court reversed the physical presence requirement in a five to four opinion released on June 21, 2018.  The Court ruled that South Dakota's requirement that remote sellers with no physical presence in the state was constitutional.  That law required remote sellers to collect sales tax from customers located in South Dakota if, on an annual basis, the seller delivers more than $100,000 of goods or services into the State or engages in 200 or more separate transactions for the delivery of goods or services in the state. 


Applying its jurisprudence in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, the Court reaffirmed that a state tax will be valid under the Commerce Clause so long as the tax:


  1. apply to an activity with a substantial nexus with the taxing State,

  2. are fairly apportioned,

  3. do not discriminate against interstate commerce, and

  4. are fairly related to the services the State pro­vides.  


Historically, under the Quill doctrine the Supreme Court required physical presence necessary before permitting states to impose a sales tax collection obligation because of the burdens complying with a myriad of state and local sales tax laws would place an undue burden on interstate commerce.


Citing the economic realities of the current, modern economy, the Court ruled that the imposition of a sales tax collection obligation without physical presence in the state is no longer an undue burden on interstate commerce.  The court cited a number or reasons for changing its jurisprudence: 


First, the Court found that Quill’s Commerce Clause doctrine was flawed on its own terms.  It noted that the physical presence requirement is not consistent with the interpretation of Complete Auto’s standard for determining whether a tax will survive a Commerce Clause challenge.[1]   Further, the Wayfair Court concluded that the Quill standard creates, rather than resolves, market distortions by treating remote sellers differently than sellers located in the state.  The Court noted that the physical presence standard creates a shelter from sales tax collection responsibility for those business that limit their physical presence. Finally, the Court found the physical presence nexus standard to be an arbitrary, formalistic distinction that current Commerce Clause precedents have rejected in favor of “a sensitive, case-by-case analysis of purposes and effects” of the tax regime.  The Court noted that the physical presence requirements of Quill, “treats economically identical actors differently, and for arbitrary reasons.”


Second, the Court noted that when examining the day-to-day functions of the current economy, the physical presence nexus standard is, “artificial, not just ‘at its edges’” referring to the Quill decision which acknowledged that the physical presence standard was “artificial at its edges.”  The Court noted that modern e-commerce does not align with a test that relies on a physical presence test and that e-commerce retailers might be closer to a customer in a state than a traditional brick’s & mortar retailer is in the same state.


Third, the Court noted that the physical presence rule is an extraordinary burden placed by the Court on the states’ authority to collect taxes and perform public functions. The majority relied on statistics showing tremendous growth in e-commerce transactions since the Quill decision and highlighted the negative economic impact the physical presence requirement is having on state budgets.


What Does This Decision Mean for You or Your Clients?


The Wayfair decision represents a sea-change in the sales tax nexus world.  Many remote sellers who were historically filing in one or only a few states may, in the future, be required to collect sales tax in more states as the states adopt a similar nexus standard to South Dakota. 


You or your clients may need to determine where you have a sales tax collection obligation under the prior Quill standard and how the new Wayfair standard will apply. 


You or your clients may need assistance to help determine which products and services are taxable in the new states. 


Finally, you or your clients may need assistance with tax automation solutions that assist in automating taxability and rate determinations on each transaction to determine the proper amount of state and local tax to collect from each customer.


Alabama, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Maine, Massachusetts, Mississippi, North Dakota, Ohio, Pennsylvania, Rhode Island, South Dakota, Tennessee, Vermont, Washington and Wyoming have already enacted some form of economic presence nexus for sales tax collection.  Many, of which, will become effective with the Supreme Court striking down the physical presence reequipment.  We anticipate that most, if not all, states that have a sales tax will eventually adopt laws, regulations and/or rules that will require taxation without physical presence.


If you have any questions, please call Bill Lunka at 612-803-3539 or reach us at


[1] It should be noted that that many states have taken the position that in imposition of income taxes with an economic presence, but not a physical presence in the state does not violate the Commerce Clause.

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