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Published by Jake Leahy

The Supreme Court’s Decision to Overrule Quill’s Physical Presence Requirement and its Impact on State Sales Tax (South Dakota v. Wayfair)

Understanding the Impact of the Supreme Court's Decision to Overrule Quill in South Dakota v. Wayfair, Inc.
January 25, 2023


The Supreme Court’s 2018 decision, South Dakota v. Wayfair, is the most significant case in the realm of State and Local Taxation over the last several decades. This case nixed the physical presence rule that had been originally established in the 1967 case, National Bellas Hess v. Illinois Department of Revenue,1 and later reaffirmed the 1993 case, Quill v. North Dakota.2


The Quill decision established a physical presence rule which stated that states were not allowed to require out-of-state businesses to collect sales tax if they did not have a physical presence within the state. This rule was seen as outdated as it did not take into account the growth of e-commerce and the fact that businesses can have a significant presence in a state without a physical location. The Supreme Court acknowledged this in their decision, stating that the physical presence rule is “unsound and incorrect” and that it has resulted in significant revenue losses for the states.

In South Dakota, like many states, taxes the retail sales of goods and services within the state. Sellers are required to collect and remit the tax to the state, but if they don’t, in-state consumers are responsible for paying a use tax at the same rate. The state estimated that it loses between $48 and $58 million annually due to the Quill decision. To address this problem, the South Dakota legislature enacted a law requiring out-of-state sellers to collect and remit sales tax “as if the seller had a physical presence in the state.” The act covers only sellers that, on an annual basis, deliver more than $100,000 of goods or services into the state or engage in 200 or more separate transactions for the delivery of goods or services into the state.


The Supreme Court ultimately sided with South Dakota, stating that the physical presence rule established in Quill is no longer applicable in today’s economy and that the South Dakota law is a valid exercise of the state’s authority to tax. The court emphasized that the Quill rule has led to significant revenue losses for states and that the South Dakota law is designed to address that problem by ensuring that out-of-state sellers have a substantial nexus with the state and that the tax is fairly apportioned.


This 2018 decision has had a major impact on the way states are able to tax e-commerce and online retailers. Previously, states were wholly unable to collect sales tax from retailers who did not have a physical presence in the states.1 With this ruling, states can now require out-of-state sellers to collect and remit sales tax, even if they don’t have a physical presence within the state. As a result, many states have adopted the standard which was permitted by the Supreme Court, 200 transactions or $100,000 annually into the state. Given that South Dakota is a relatively small state, it remains to be seen whether larger states will be permitted to adopt this same standard, or if a larger threshold might be required.


One interesting tidbit to note about this decision is that it was Justice Anthony Kennedy, the perennial swing vote, who authored the Wayfair opinion. In 2015, Kennedy authored a concurrence in Digital Marketing Association v. Brohl, where he warned “it is unwise to delay any longer a reconsideration of the Court’s holding inĀ Quill.”4 On the contrary though, Kennedy concurred in the 1992 Quill decision, alongside Justice Thomas, who signed onto Kennedy’s majority opinion in Wayfair.

3While PL 86-272 precludes a company exclusively selling tangible personal property from establishing nexus for state income tax purposes with a state solely based upon the company’s solicitation within the state.

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