Have you ever bought something on the internet? Did the seller charge you tax? If not, have you ever wondered why?
Many online retailers have not been charging tax to their customers because of a U.S. Supreme Court case from 1992, Quill Corp. v. North Dakota, 504 U.S. 298 (1992). In Quill, the Court held that states could not compel a company to collect or remit tax on its sales to state residents unless the company has "physical presence" within that state.
In the decades following Quill, online retailers have been able to sell products to customers at a "no tax discount" relative to traditional brick-and-mortar stores. This market imbalance became a huge issue with the growth of internet commerce, which has put state governments in a bind. Normally, residents of a state are still required to pay tax even when the online retailer does not collect it. In practice, state departments of revenue are unwilling or unable to audit millions of individual residents for potentially unpaid sales or use tax. This is especially true in Florida, where the absence of a state income tax means that Florida residents do not normally file any state tax returns. (1)
States have been left to audit businesses that are often surprised they had to pay tax on their online purchases. Meanwhile, the unpaid taxes on purchases by individuals were left uncollected. (2) Though state governments have never been happy about this situation, until recently they were not actively doing much to change things other than lobbying Congress. The approach of the states changed in 2015, when U.S. Supreme Court Justice Anthony Kennedy invited states to take "another run" at Quill. The result of these state efforts led to the Court's recent decision in South Dakota v. Wayfair, Inc., 585 U.S. --, 138 S. Ct. 2080 (2018).
The Wayfair decision overruled Quill and eliminated the "physical presence" test. Now, every state in the union can potentially force online retailers to collect and remit sales tax on their sales into those states. This new dynamic will color the entire field of sales and use taxation for decades to come.
The Way Things Used to Be
In order to comprehend how much things could change under Wayfair, we must examine why the world of online sales tax has evolved in the way it has. The starting point for the analysis is Quill, the Supreme Court's 1992 decision on "remote seller" tax liability. (3)
The Quill case involved an office equipment and supply company, Quill Corp., that solicited business through catalogs, flyers, advertisements in national periodicals, and telephone calls. One of the states that it solicited business in was North Dakota, a state where Quill Corp. had at least 3,000 customers. None of Quill Corp.'s employees or facilities were located in North Dakota. All of its merchandise was delivered to North Dakota customers via mail or common carrier from locations outside of the state. (4)
Quill Corp. took the position that North Dakota did not have the power to compel it to collect a use tax on goods that it sold to its North Dakota customers. The Tax Commissioner of North Dakota filed suit in state court to compel Quill Corp. to collect use taxes on its North Dakota sales. The North Dakota Supreme Court departed from prior U.S. Supreme Court precedent to hold that Quill Corp. was obligated to collect and remit use tax to the state. The U.S. Supreme Court reversed, holding that Quill Corp. lacked sufficient "nexus," or connection, with North Dakota to allow the state to compel Quill Corp. to collect taxes on its sales to North Dakota residents. (5) The Quill decision created two distinct nexus tests based on the U.S. Constitution's due process clause and commerce clause, respectively. These tests were intended to help courts decide whether a state has a close enough connection to a remote seller to allow it to impose taxes on its sales. A state had to "pass" both nexus tests under Quill in order to constitutionally impose tax on transactions between state residents and remote sellers. (6)
The due process nexus test under Quill has survived the Wayfair decision and remains applicable. This test is a "flexible" standard that is not dependent on a seller's physical presence within a state. Instead, a remote seller can meet the due process nexus requirement through "purposeful direction" of its efforts toward a state to solicit business. The flexibility of this standard reflects the purpose of the due process clause, which is primarily about "the fundamental fairness of government activity." The relevant question is, therefore, whether the remote seller has purposefully availed itself of the economic market in the forum state. Under Quill, a remote seller is unlikely to win a challenge to a state statute based on the due process nexus requirement. A remote seller that avails itself of a state's economic market to any significant degree will satisfy the due process nexus requirement. (7)
The commerce clause nexus test created under Quill did not survive Wayfair. This test was a bright-line test that required a seller to have a physical presence in a state before the state could impose a duty to collect use taxes. (8) Though Quill itself addressed a company engaged in mail-order sales, its holding applied to internet retailers as well: Unless a vendor had a physical presence in a given state, that state could not require the vendor to collect sales or use taxes on a sale to a resident of that state. This "physical presence" test was what the Court disposed of in Wayfair.
Quill Was a Safe Harbor
The physical presence test created by Quill meant that if a company did not have physical presence within a state, that state could not, as a matter of constitutional law, force that company to collect and remit sales and use tax. In this way, physical presence served as a "safe harbor" for retailers. They could build their businesses around the certainty that if they did not have physical presence within a state, they would not have any tax collection responsibilities in that state.
The safe harbor of physical presence was only one part of the analysis, though. If a company had some physical presence in a state, the question always existed as to how much of a presence was enough to create "substantial nexus" sufficient to allow the state to impose tax collection and remittance duties on the taxpayer. The taxpayer could always argue that its particular example of physical presence was not enough of a presence to rise to the level of substantial nexus required by the commerce clause.
An example of this is found in the case of Florida Department of Revenue v. Share International, Inc., 676 So. 2d 1362 (Fla. 1996), which involved a Texas company in the business of selling chiropractic supplies. The company had no offices in...