J.D., May 2020, Indiana University Robert H. McKinney School of Law; M.B.A., May 2020, Indiana University Kelley School of Business; B.A., DePauw University.

Recipient of the Papke Prize for Best Note in Volume 53.

On June 21, 2018, the United States Supreme Court decided South Dakota v. Wayfair, a decision that overruled the judicially created physical presence rule established in Quill Corp. v. North Dakota ex rel. Heitkamp and National Bellas Hess, Inc. v. Department of Revenue of State of Illinois. The United States Supreme Court held that states may now require a remote seller to collect and remit sales and use tax without having a physical presence in the taxing state.

For the fifty years before the Supreme Court decided Wayfair, a state could only require a seller with physical presence in the state to collect and remit its sales or use tax. This formal, bright-line rule allowed taxpayers to avoid the imposition of a state’s sales and use tax by structuring their business operations to ensure that they did not maintain an office, own property, or have employees in a particular state. The disparate tax treatment of in-state and out-of-state sellers led to what is commonly referred to as the “tax gap.” The “tax gap” refers to use tax revenue corporate and individual buyers owe but fail to pay on purchases from sellers not physically present in the state, i.e. remote sellers.

Before Wayfair, states could not require remote sellers to collect and remit its taxes. Rather, the buyer was responsible for paying the tax due on the sale. Most buyers do not pay the tax, however, either because they do not know they owe tax, or they simply choose not to pay it. Moreover, it was not feasible for state departments of revenue to pursue every resident buyer who may not have paid tax on purchases from remote sellers. Accordingly, due to the barrier of the physical presence rule, remote sellers have been able to use states’ economic marketplaces and infrastructure, without paying their fair share for that use. Indeed, the Government Accountability Office estimated that the tax gap in South Dakota is between $48 and $58 million annually.

To curtail the loss of tax revenue caused by the physical presence rule and to adjust to the evolution of the e-commerce industry, the South Dakota legislature enacted SDLRC Codified Law 10-64-2, which proclaimed economic presence, not physical presence is sufficient to levy a tax on remote sellers, in direct conflict with Quill, with the goal of having the United States Supreme Court reconsider the validity of Quill’s physical presence rule under the Commerce Clause. The South Dakota Supreme Court found this law to be unconstitutional under the binding precedent of Quill. After granting certiorari, the U.S. Supreme Court overruled Quill and found the physical presence rule unsound. Although state governments won a substantial victory because the Wayfair Court struck down the physical presence rule, the battle is not over yet. Uncertainty remains. If not physical presence, what satisfies substantial nexus under the Commerce Clause?

Post-Wayfair, tax administrators and taxpayers alike now need to know how state governments and businesses should operate under this new rule. Put another way: What new rule defines the connection necessary for a state to have taxing jurisdiction over a remote seller? The Wayfair decision gives little guidance, explicitly leaving the task of filling in the details to a polarized Congress. By overturning Quill without explaining the way forward, the U.S. Supreme Court has abdicated its responsibility to settle the unsettled. [Read entire Article here].


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