With these words, the world of sales tax as we knew it was turned upside down:
Held: Because the physical presence rule of Quill is unsound and incorrect, Quill Corp. v. North Dakota, 504 U. S. 298, and National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753, are overruled.
Much of what we know and understood as “the law” for more than 50 years is no longer valid. The clear bright line standard of physical presence articulated by the National Bellas Hess decision (1967) and Quill v. North Dakota (1992) is no longer the law. It’s been replaced by, well – we don’t really know yet.
The decision comes as a bit of surprise to many. While most commentators initially thought that Quill and Bellas Hess were doomed when the Court accepted the Wayfair case back in January, the tone and tenor of oral arguments in April caused many to think the Court was inclined to let Congress make the final call.
However, in a 5-4 majority, Justice Kennedy articulated that the time had come for Quill to go. In fact, the Court essentially said Quill was flawed from the start for the following reasons:
- The physical presence rule is not a necessary interpretation of Commerce Clause Nexus. Rather, it was a standard of the court’s own creation that in retrospect does not serve its intended purpose.
- Quill creates, rather than resolves, market distortions. The Court noted that Wayfair cites their lack of nexus as a customer benefit.
- Quill imposes the sort of arbitrary distinction that modern Commerce Clause precedents reject in favor of “a sensitive, case-by-case analysis of purposes and effects.”
- The “physical presence” requirement treats economically identical situations differently for arbitrary reasons. While protecting small sellers may be a valid concern, doing so based on whether or not the seller has in-state inventory is arbitrary.
The Court rejected the notion that Congress is more equipped to determine this case, as it is inconsistent with the Court’s proper role in American government to ask Congress to address a false constitutional premise of this Court’s own creation. As to whether states could impose economic nexus standards retroactively, the Court noted that the South Dakota law is expressly not retroactive and opted not to opine.
On technology, the Court held that software is available at a reasonable cost that makes the compliance burden more manageable – a fact we have known at Sovos for years.
What Happens Next?
One of the hotly-debated issues during oral arguments was whether a decision vacating Quill would leave states free to enact nexus standards where even a single sale would create a tax collection and remittance obligation. This Decision does no such thing. Rather, in a post-Quill world, nexus standards will be evaluated under tests articulated in the National Bellas Hess and Pike v. Bruce Church holdings, where the court is free to examine all the facts and circumstances surrounding a rule in determining whether interstate commerce is unfairly burdened.
In fact, the Wayfair litigation has been officially remanded back to the lower court to allow Wayfair to make any other arguments (aside from physical presence) that the South Dakota law violates the Commerce Clause. While the potential success is highly debatable, it does likely prevent South Dakota from enforcing the new law until the case is finally settled. However, the impact is by no means limited to South Dakota.
Here’s a quick look at the national landscape:
- A handful of states (like North Dakota and Vermont) have economic nexus laws on the books that are slated to take effect immediately upon a Supreme Court decision. These states could seek to impose their rules immediately.
- Alabama has ongoing litigation that is similar to South Dakota, but has moved through the legal system far more slowly. Post-Wayfair, the arguments now change and the Alabama law will be evaluated under the new standard.
- Other states have statutory nexus rules that are defined to expressly follow Constitutional requirements however defined. It’s possible that these states could simply enact a rule that sets an economic standard in motion.
- Another 13 or so states have economic nexus laws with past or near-term effective dates. It’s possible that these laws will also be challenged, but the arguments become far more subtle in a post-Quill world.
The Role of Congress
The Wayfair decision changes nothing about the role of Congress. They retain their power to regulate interstate commerce and could enact a statute that defines what does constitute substantial nexus. Whether or not this decision will spur them into action remains unknown.
Call to Action
Sellers need to pay immediate attention to this development. If you haven’t already taken steps to position yourself to handle the collection and remittance responsibilities associated with an expanded nexus footprint, the time is now, and any reasons supporting delay have been largely eliminated. States are already positioned to act and have been waiting for this day for years. There is no reason to believe they will wait much longer. Expect a flood of statutory changes, rules and regulations, and even some more lower-court litigation that will make your nexus footprint a very quickly moving target.
To have all your questions about this ruling answered, join our live Q&A with regulatory experts Chuck Maniace and Alex Koral on June 27.
