By: Natasha Varyani, Adjunct Professor of Law
The United States Supreme Court is scheduled to hear arguments in the case of South Dakota v. Wayfair, Inc., addressing the issue of when sales tax needs to be collected by online retailers engaged in eCommerce. In its 1992 decision in Quill v. North Dakota, the Court ruled that a retailer must have a “physical presence” in a state in order to be subject to that jurisdiction’s sales and use tax laws. The Court in Quill was revisiting its 1967 holding in National Bellas Hess v. Department of Revenue, in which it reviewed the authority of a state to impose its sales and tax laws on an out of state entity doing business in state.
Both Bellas Hess and Quill dealt with retailers that conducted sales through mail order, and their only presence in state was the catalogue of products offered. The Court in Quill cited “tremendous social, economic, commercial and legal innovations” that had occurred in the twenty-five years that had passed since its holding in Bellas Hess to justify overruling that former holding.
Twenty-six years have passed since Quill. In that time, the change in social, economic, and commercial life has been both dramatic and extremely rapid, so it only follows that the law should adapt in response. The holding in Quill articulated the “physical presence” standard, which demanded that, in order for a state to impose its sales and use tax laws on a retailer, that retailer was required to have a physical presence in state. Understanding the standard for imposition of sales tax, some retailers, notably Amazon.com, selected jurisdictions for their headquarters and warehouses intentionally to avoid having a physical presence and therefore being subject to sales and use tax laws in high tax jurisdictions. Though Amazon.com has a business plan that focuses less on state sales tax than it formerly did, online retailers like Wayfair (the plaintiff in this suit), Overstock.com, and NewEgg have benefitted from the physical presence standard set forth in Quill.
States have grown increasingly frustrated by a standard based on physical presence, which they view as outdated and obsolete given the way that commerce has evolved with the development of the Internet. South Dakota enacted a statute that it hoped would be challenged and reach the U.S. Supreme Court in the hope that, as it did in Quill, the Court would, a quarter century later, update the standard.
It should be noted, however, that the Court in 1992 strongly suggested that this issue be taken up by Congress. Given the Due Process and Commerce Clause concerns about imposing sales and use tax obligations on an entity that does not have a physical presence in state on the one hand, and the revenue uncollected by states on the other, the Court encouraged Congress to examine the issue. There have been several bills introduced and even passed by at least one chamber since Quill, but none enacted into law. Also since Quill, the Streamlined Sales and Use Tax Commission has been created to devise a solution designed to simplify the process of reporting sales tax in large number of jurisdictions.
As the Court re-considers the issue in Wayfair v. South Dakota, the twenty-five years that have passed since Quill have seen changes in technology and commerce unlike any other in history. Though there is wisdom in consideration of these issues by the legislature, retailers, states and attorneys across all jurisdictions will be watching as the Court reexamines the constitutional limitations on eCommerce.