Do States Care About Quill Anymore?

Nexus is the connection between a taxpayer and a state that triggers an out-of-state taxpayer’s obligation to comply with that state’s tax laws. Although nexus laws differ between states, the United States Supreme Court decision in Quill Corp. v. North Dakota has remained the controlling authority for over twenty years. 54 U.S. 298 (1992). Quill held that economic presence was not sufficient to establish nexus for a remote seller. Id. But recently, states across the U.S. have begun to attack the physical presence requirement imposed by Quill through legislation seeking to recoup sales tax from online sales.

Texas followed suit, although it has not gone as far as other states. Texas enacted an affiliate nexus law and amended existing law in a way that suggests that sale of tangible personal property into Texas creates nexus, although the Comptroller has yet to enforce this provision. See Tex. Tax Code § 151.107(a)(3), (7) & (8) (effective Jan. 1, 2012). Yet, in contrast, the Comptroller cited Quill as the basis for its 2015 rule amendment eliminating the trailing nexus rule, which required out-of-state sellers to collect and remit sales tax for twelve months after the seller ceased to have nexus in Texas. See Tex. Admin. Code § 3.286 (amended eff. June 3, 2015).

While at least one member of the U.S. Supreme Court has indicated a desire to revisit Quill, the Court has not addressed the constitutionality of the states’ expanded nexus provisions. That may change. South Dakota recently adopted an economic nexus standard for sales and use tax. See South Dakota S.B. 106, enrolled 2016. Under the new law, a remote seller without a physical presence in South Dakota must remit sales tax if either (1) the seller’s gross revenue from the sale of tangible personal property, products transferred electronically, or services for delivery into South Dakota exceeds $100,000, or (2) the seller sold tangible personal property, any product transferred electronically, or services for delivery into South Dakota in 200 or more separate transactions. Id.

Recognizing the potentially controversial nature of the legislation, the new law contains an “expedited review mechanism,” allowing the courts to expeditiously determine the constitutionality of the law given the potential conflict with Quill. See id. Under this provision, South Dakota recently brought a declaratory action against Wayfair, Systemax,, and Newegg (remote sellers that the state believes meet the new nexus criteria) to determine the validity of the statute. Under the new law, the filing of the suit triggers an injunction, thereby prohibiting South Dakota from enforcing the new law while the suit is pending. Id. Further, the losing party must appeal the circuit court’s decision directly to the South Dakota Supreme Court, bypassing the state’s intermediate appellate court. Id.

A successful state challenge to the physical presence requirement established in Quill could have a broad impact on states’ power, including Texas, to require remote sellers to collect and remit sales tax. If the U.S. Supreme Court takes the case and South Dakota prevails, many other states will undoubtedly enact similar economic nexus provisions to collect tax from online retailers.