The Real Deal - August 2018

Date: August 14, 2018

U.S. Supreme Court Decision Permits States to Charge Sales Tax for Online Purchases
By: Jordan Halle

On June 21, 2018, the Supreme Court issued its opinion in South Dakota v. Wayfair, Inc., overturning Quill Corp. v. North Dakota, 504 U.S. 298 (1992) and National Bellas Hess v. Illinois, 386 U.S. 753 (1967), and ushering in a new paradigm for sales tax nexus. Ultimately, the court held that the physical presence rule as refined in Quill was unsound and incorrect and that states may charge sales tax on purchases from out-of-state sellers that do not have a physical presence in the taxing state, so long as the seller has “substantial nexus” with the taxing state. 

By way of background, in Quill, North Dakota sought to collect sales tax on an out-of-state mail-order retailer that did not have any offices, employees or warehouses in North Dakota. North Dakota’s statute imposed a sales tax collection obligation on every retailer that made regular or systematic solicitations in the state, which was defined to include three or more advertisements in a 12-month period.

The Court in Quill opined that the dormant Commerce Clause prohibits states from taking actions that unduly interfere with or burden interstate commerce. Therefore, the Court embraced a bright-line physical presence requirement, explaining that “a bright-line rule in the area of sales and use taxes also encourages settled expectations and, in doing so, fosters investment by businesses and individuals.” That’s why you may not have been taxed by certain online retailers that did not have any Maryland contacts (though you may have had a separate use tax obligation).

With that (extremely condensed) history, we get to Wayfair.

In 2016, South Dakota passed a law that required out-of-state sellers to collect and remit sales tax “as if the seller had a physical presence in the state.” This obligation only applied if, annually, the retailer delivered more than $100,000 of goods or services or engaged in 200 or more separate transactions for delivery into the state. The statute specifically does not impose retroactive taxation.

Wayfair and other retailers challenged the constitutionality of the statute and the South Dakota Supreme Court affirmed the trial court’s grant of summary judgment in favor of Wayfair, due to Quill and its progeny.

The U.S. Supreme Court granted cert and ultimately held in favor of South Dakota, vacating the judgment and remanding the case for further proceedings. Justice Kennedy, writing for the Court, advanced three reasons: 

First, the physical presence rule is not a necessary interpretation of the requirement that a state tax must be “applied to an activity with a substantial nexus with the taxing State.” Second, Quill creates rather than resolves market distortions; Justice Kennedy wrote that “The Internet’s prevalence and power have changed the dynamics of the national economy”, stating that at the time Quill was decided, revenues for mail order products were around $180 billion, while e-commerce retail sales in 2017 were estimated at $453.5 billion. And third, Quill imposes the sort of arbitrary, formalistic distinction that the Court’s modern Commerce Clause precedents disavow. Interestingly, the Court did not rule on whether retroactive application would be permitted under Wayfair.

Chief Justice Roberts and Justices Breyer, Sotomayor, and Kagan dissented, essentially arguing that Congress was the proper body to resolve this issue. In one particularly interesting section, Chief Justice Roberts summarizes the new issues faced by online retailers:

The Court, for example, breezily disregards the costs that its decision will impose on retailers. Correctly calculating and remitting sales taxes on all e-commerce sales will likely prove baffling for many retailers. Over 10,000 jurisdictions levy sales taxes, each with different tax rates, different rules governing tax-exempt goods and services, different product category definitions, and different standards for determining whether an out-of-state seller has a substantial presence in the jurisdiction. A few examples: New Jersey knitters pay sales tax on yarn purchased for art projects, but not on yarn earmarked for sweaters. Texas taxes sales of plain deodorant at 6.25 percent but imposes no tax on deodorant with antiperspirant. Illinois categorizes Twix and Snickers bars – chocolate-and-caramel confections usually displayed side-by-side in the candy aisle – as food and candy, respectively (Twix have flour; Snicker’s don’t), and taxes them differently.

For retailers that sell into Maryland, the most recent pronouncements from the Comptroller indicate that it will “impose sales tax collection requirements as broadly as is permitted under the United States Constitution.”

Please feel free to contact Jordan Halle at or 443-263-8205 with additional questions regarding these recent developments and how they may impact your business.