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Eenie, Meenie, Miney, Mo – Is Physical Presence Necessary, Yes or No?

Thomas M. Frascella
Thomas M. Frascella Director, Tax Strategies, State & Local Tax Group Leader

Are You Eligible for the Research & Development Tax Credit?

Many of you probably remember the familiar rhyme often used to decide who to pick for your team or which action you should take. I was reminded of it as a result of the oral arguments that were recently presented before the United States Supreme Court in the South Dakota v. Wayfair, Inc. case.

I wondered whether it was possible that the Court would use the rhyme to render its decision in the case. Of course, I jest; I don’t actually believe the Supreme Court would resort to using a children’s rhyme to decide a case with such national importance. However, it is difficult to determine whether the Court is leaning toward a pro-taxpayer or a pro-state position on the issue of whether physical presence is required to create sales tax nexus for out-of-state sellers.

The Wayfair case involves a South Dakota statute that requires an out-of-state seller with greater than $100,000 in annual sales or 200 separate transactions to collect and remit sales tax to the state. The taxpayer in this case, Wayfair, challenged the constitutionality of the statute and the Supreme Court agreed to hear the case. Oral arguments in the matter were held on April 17, 2018 and a decision is expected to be rendered some time before the end of June 2018.

In 1992, the Supreme Court decided Quill Corp. v. North Dakota, another case involving a remote seller. It established the physical presence nexus standard for sales tax purposes, which is still relied on by retailers today. Quill was decided more than 25 years ago – in an era before e-commerce existed – and it is the basis for South Dakota’s contention that the standard is no longer applicable because of the evolution of retail.

Many states have already begun to adopt bright line nexus standards similar to the one enacted by South Dakota as an attempt to overcome the protection afforded to remote sellers under the Quill decision. Even the Supreme Court questioned whether the decision has outlived its usefulness in a concurring opinion issued by Justice Kennedy in the 2015 Direct Marketing Association v. Brohl case.

Some would argue that this is not an issue for the Court to decide, and that action must be taken by Congress to legislate change. Although Congress has introduced legislation that would address a remote seller’s responsibility to collect and remit sales tax during several sessions, it has failed every time. One theory advanced by remote sellers is that by failing to enact legislation overturning Quill, Congress has, in fact, acted in sustaining the current physical presence nexus standard.

The post-Quill landscape is as unclear today as it was before Wayfair’s oral arguments. The Court has concerns about the effect of overturning Quill and the ancillary issues that will arise as a result. One of the biggest concerns is the retroactivity of an economic nexus standard. As expected, South Dakota argued that retroactivity is not an issue. However, Wayfair appropriately noted that it is well established doctrine that court decisions have retroactive effect and noted that there are approximately 30 states where retroactivity could be a real concern.

One thing is clear: states will continue to adopt laws regarding economic nexus and a remote seller’s responsibility to collect and remit sales tax. Overturning Quill is only one step in addressing a remote seller’s responsibility. Questions such as a small business exemption will still need to be addressed. The Court will only decide the question before them regarding physical presence. Any potential exemptions related to annual sales, number of transactions, or small businesses will have to be legislated on a state-by-state basis, unless Congress steps in and finally passes legislation to deal with the matter on a national level.

Sit tight; it is going to be a bumpy ride. We will continue to provide you with updates as developments occur.

Thomas M. Frascella can be reached at Email or 215.441.4600.


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Thomas M. Frascella

Thomas M. Frascella

Director, Tax Strategies, State & Local Tax Group Leader

State and Local Tax Services Specialist

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