Bylined Articles

Double Whammy: Supreme Court Reviews Sales Tax Nexus as More States Pass Remote Seller Reporting Laws

By Stanley R. Kaminski
February 6, 2018
Bloomberg Tax

Stanley R. KaminskiIn its 1992 Quill decision, the U.S. Supreme Court ruled that a state could not impose sales tax obligations on out-of-state sellers without some physical presence. The years following the Quill decision have seen a dramatic growth in online retailing. In this article, Duane Morris LLP’s Stanley R. Kaminski discusses the U.S. Supreme Court’s decision to review the Wayfair case, involving out-of-state vendors, and what impact it may have on Quill’s physical presence requirement. 

‘Quill’s’ Physical Presence Test Under Fire

The Supreme Court of the United States has accepted for review the case of South Dakota v. Wayfair, Inc., et al, in which the state of South Dakota has challenged the continued viability of its 1992 Quill Corp. v. North Dakota decision that required some physical presence of a remote seller in a state before a state could impose its sales tax collection obligations on the seller. The Supreme Court in 1992 held it was up to Congress to change the test. In this new case, the South Dakota Supreme Court held that South Dakota’s attempt to legislatively override Quill was in violation of the law. By hearing the case, the U.S. Supreme Court will now decide whether to change the law or continue to allow the physical presence standard to stand, until and unless the Congress decides to change it. This decision could have far-reaching effects on interstate commerce, especially impacting internet vendors. 

What does that mean for a remote seller like an internet vendor? Well, currently an internet (or online) vendor of merchandise will not be required to register and collect sales/use tax for a state unless the vendor has some physical presence in the state, such as solicitors, agents, property, etc. The issue was how much physical presence was sufficient to create tax nexus under the Quill decision. If the Supreme Court reverses Quill’s physical presence test, then possibly just soliciting customers in a state and shipping products to those customers may create tax nexus and thus a tax collection obligation for an internet vendor. Obviously, this could be a nightmare for thousands of small online vendors. 

So why did the Supreme Court take the Wayfair case? Was it really to reverse Quill, or was it to limit Quill’s application or was it even possibly to uphold Quill? It should be remembered that the Quill Court’s decision upholding the physical presence requirement was primarily based on stare decisis, since the physical presence test had been in use for decades before the Quill case. In Quill the physical presence test at issue was based on the case of National Bellas Hess v. Department of Revenue, 386 U.S. 753 (1967). This Bellas Hess physical presence rule was part of the longstanding framework of interstate commerce taxation which made it hard for the Court to abandon. As the court said in Quill: “[T]he Bellas Hess rule has engendered substantial reliance and has become part of the basic framework of a sizeable industry.” Because of this, the Quill court did not want to upend the apple cart. The court also made it clear in Quill that it believed it was the job of Congress to change such a long standing test and declared that “Congress is now free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes.” So a complete reversal of Quill may not be so certain. 

New State Reporting Requirements Target Remote Sellers

Even without the Supreme Court’s new review of the physical presence test, internet, catalog and other remote sellers of merchandise should also be worried about the new reporting laws that a number of states are passing. So far, six states have passed laws that require remote sellers (sellers with no office, traveling salesmen, property or other physical presence in such state) that have not registered to collect sales/use tax for such states, to send notices to their customers of the sales/use tax not collected, and to then file annual reports with such states identifying their customers and detailing their sales of tangible personal property to such customers. Notably, another five states have passed notice-only laws in which the remote seller must notify the customer of the sales/use tax liability. 

The sales threshold for remote sellers to be subject to these laws is very low—for example, in Washington state the threshold is $10,000 in annual sales. To avoid these reporting requirements, states allow the remote sellers to register for and start collecting sale/use taxes for the states—the option the states surely prefer and the obvious underlying purpose behind the notice and reporting laws. These state laws also provide that the failure to comply with these new requirements will subject the remote sellers to substantial state penalties. For example, in Colorado, there is a $5 penalty per sale for each sale that the vendor does not send a customer a notice of the tax obligation, a $10 penalty for each customer summary it does not send to a customer, and a $10 penalty for each customer it leaves off its annual report to the state. As you can see, this potentially makes ignoring these laws a costly choice for a remote seller with significant sales to customers in these states. 

The current states with remote seller laws with full notice and reporting requirements are Colorado, Alabama, Washington, Louisiana and Rhode Island, while Pennsylvania’s law goes into effect February 1, 2018. The states of Oklahoma, Tennessee, Vermont, South Dakota and Kentucky only have notice to customer laws, but no state reporting. It should be noted that this new tax enforcement regime (when it was applied by Colorado) was blessed by the federal appeals court in Direct Mktg. Ass’n v. Brohl, 814 F.3d 1129 (10th Cir. Feb. 22, 2016) (cert. denied). As a result, states like Colorado imposing these new reporting and notice laws are anticipating that they can legally enforce these new regulatory requirements against remote sellers. Not surprisingly, many other states are also considering imposing these laws. 


As a result of the Supreme Court’s taking up the Wayfair case and these new regulatory requirements, remote sellers should take caution. Not only may the physical presence test of Quill possibly disappear, even if it survives sellers in a growing number of states will still be faced with whether to register to collect sales/use tax in these states or follow these states’ new regulatory rules that may require the disclosure of their customers and possibly filing reports of their sales. One thing seems certain however: 2018 will be a challenging year for remote sellers. 

Stanley R. Kaminski concentrates his practice in the areas of state and local taxation, including multistate sales and use tax, franchise tax and corporate and individual income tax issues. He is a partner in Duane Morris’ Chicago office. 

Reprinted with permission of Bloomberg BNA