The Physical Parameters of Internet Retail Tax


Last month, the U.S. Supreme Court agreed to hear South Dakota’s direct challenge to Quill v. North Dakota, paving the way for large-scale changes to the existing retail tax structure.[1] The case, South Dakota v. Wayfair, Inc., argues that the 1992 ruling limiting states from taxing remote retailers without a physical presence within the state is obsolete in an e-commerce era.[2]

In Quill, the Court considered whether states could compel use taxes from remote retailers.[3] Generally, a use tax is imposed on retailers for items that are used, consumed, or stored within the state though the underlying purchase occurs out-of-state.[4] It held that retailers must have a physical presence within the taxing state to satisfy the substantial nexus threshold.[5]

By adopting this bright-line rule, the Court hoped to set clear limitations on state taxing authority.[6] Instead though, this attempt has caused considerable confusion because it has a limited scope involving a mail-order company.[7] It could not foresee the rule’s implications on a changing retail landscape, which has been complicated by the rise of e-commerce. [8]

Perhaps in anticipation of this, the Court framed the substantial nexus threshold on the Commerce Clause rather than the Due Process Clause.[9] The Commerce Clause focuses on the structural balance between states and interstate commerce.[10] While Congress cannot violate due process, it has authority over state actions that harm interstate commerce.[11] Using this reasoning, the Court specifically invited Congress to ultimately decide this issue.[12]

However, Congress has yet to provide a clear national framework though proposals have been introduced in almost every session since 2003.[13] In 2013, the Marketplace Fairness Act passed the Senate with a 69-27 vote but never reached the House floor.[14] Many blame House Judiciary Committee Chair Robert Goodlatte, R-Va. for stalling efforts to move the proposal out of the committee for a floor vote. [15] Currently, the Quill standard remains, costing state and local governments an estimated $13 billion in 2017.[16]

States have responded by introducing their own laws or regulations.[17] These attempts have further blurred the bright-line rule in Quill.[18] For example, the Court defined physical-presence as a “small sales force, plant, or office,”[19] but some states expanded this definition to include online retailers with in-state web servers.[20] This inconsistency complicates how tax policies will apply to retailers.[21] This directly counters the policy rationale for passing the physical-presence requirement; that is, to “encourage settled expectations and, in doing so foster[] investment by businesses and individuals.”[22]

Considering this, in Direct Marketing Association v. Brohl, Justice Kennedy suggested it may be time to revisit the Quill standard.[23] He invited the argument that interstate commerce needs to pay a fair share of state taxes, reasoning that in Quill, “the Internet was in its infancy.”[24] Nowadays, it accounts for a substantial percentage of the market, making remote retailers more likely to satisfy the substantial nexus threshold for tax-collection duties.[25]

South Dakota is one of nearly twenty-five states that responded to this invitation.[26] It passed legislation directly challenging the Quill standard.[27] The statute, which was written in the form of a legal brief, required companies exceeding $100,000 in sales to collect 4.5% in sales taxes on purchases made by South Dakota residents.[28]

While stare decisis is an important consideration, the retail industry today is vastly different from that in Quill and likely cannot be defined by physical parameters.[29] Many believe that the Quill standard impedes economic efficiency and investment across state lines.[30] Brick-and-mortar retailers, in particular, argue that this standard gives online retailers a distinct advantage.[31]

Still, some believe that the physical-presence requirement should stand, arguing that the market will force retailers to adjust to online demand by setting up more warehouses across states.[32] In a recent statement, Goodlatte, expressed support for the Court upholding a bright-line physical-presence standard, arguing that “[i]t is crucial that businesses have direct recourse to their regulators in order to maintain a check against overly aggressive state and local governments exporting burdensome regulations on businesses to which those governments have no accountability.”[33]

It is difficult to predict how Justices will revisit the issue of a national remote retail tax. If the Court decides to overrule the physical-presence requirement, states are expected to immediately pass legislation compelling remote retailers to collect and remit use taxes.[34] Contrarily, if the Court upholds the Quill precedent, the decision will largely be left for Congress, and states will be left to navigate the current tax regime for internet retail.[35] Regardless, the holding will have large-scale ramifications on the current national tax scheme.[36]

[1] See Maria Koklanaris, Justices Likely To Set New Tax Standard For Remote Vendors, Law360 (Jan. 15, 2018, 5:07 PM),

[2] See generally State v. Wayfair Inc., 901 N.W.2d 754 (S.D. 2017).

[3] See generally Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

[4] See Amy Fontinelle, Use Tax, Investopedia, (last visited Feb. 10, 2018).

[5] Quill, 504 U.S. at 311.

[6] See Yilu Zhang, An Analysis of Quill and Federal Remote Sales Tax Legislation, Tax Analysts (July 4, 2016),

[7] Quill, 504 U.S. at 303.

[8] See generally Maria Koklanaris, U.S. Supreme Court to Consider Internet Retail Taxes’ Reach, Law360 (Jan. 12, 2018, 2:59 PM),

[9] See id.; see also Zhang supra, note 6.

[10] Quill, 504 U.S. at 303; see also Zhang supra, note 6.

[11] Quill, 504 U.S. at 303; see also Zhang supra, note 6.

[12] Quill, 504 U.S. at 318. (“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.”).

[13] Paige Jones, Congressional Paralysis Unlikely to End in Time to Tackle Online Sales, Tax Analysts (Jan. 23, 2018),

[14] Id.; see also Jonathon Weisman, Internet Sales Bill Gains Ground in Senate, N.Y. Times (Apr. 23, 2013),

[15] See Jones, supra, note 12; see also Mario Trujillo & Naomi Jagoda, Online Sales Tax Supporters Hope Gamble Pays Off, The Hill (Feb. 16, 2016),; Jennifer McLoughlin, Congress Still Chewing Over Digital Sales Tax Solution, Bloomberg News (Jan. 13, 2013),

[16] See Koklanaris supra, note 8.

[17] See Natalie Olivo, Legal Scholars Urge High Court to Undo Online Sales Tax Ban, Law360 (Nov. 2, 2017, 6:42 PM),

[18] See generally Quill Corp. v. North Dakota, 504 U.S. 298, 315 (1992); see also see also Zhang supra, note 6.

[19] See Quill, 504 U.S. at 315; see also Zhang supra, note 6.

[20] See Zhang supra, note 6.

[21] See Quill, 504 U.S. at 316.

[22] Id. at 315.

[23] See Eugene Vologh, Justice Kennedy’s Opinion Supporting States’ Collecting Taxes on Internet/Mail-Order Transactions, Wash. Post (March 3, 2015),

[24] See Direct Mktg. Ass’n v. Brohl, 135 S. Ct. 1124, 1135 (2015) (Kennedy, J., concurring) (“But in 1992, the Internet was in its infancy. By 2008, e-commerce sales alone totaled $3.16 trillion per year in the United States”).


[26] See Koklanaris, supra, note 1; see also Olivo, supra note 16.

[27] See Olivo, supra note 16.

[28] Id.; see also State v. Wayfair Inc., 901 N.W.2d 754, 758 (S.D. 2017); Vidya Kauri, Tax on Out-of-State Retailers Nixed by SD Justices, Law360 (Sept. 14, 2017, 11:27 AM),

[29] See Olivo, supra note 16.

[30] See Koklanaris, supra note 1.

[31] Id.

[32] Id.; see also Jones, supra note 12.

[33] See Jones, supra note 12.

[34] See Koklanaris, supra note 1.

[35] Id.

[36] Id.


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Fordham Journal of Corporate & Financial Law