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Challenging Quill: What started with North Dakota could end with South Dakota


internet sales tax

The United States Supreme Court ruling in Quill Corp. v. North Dakota, 504 U.S. 298 (1992) was pivotal. Retailers have relied on it to protect them from collecting taxes in states where they have no physical presence. Yet much has changed since the Quill decision, which predated ecommerce. And, as it turns out, even the Quill decision reflects ambivalence on the court’s part.

Now, in a curious twist of fate, what started with North Dakota could end with South Dakota. The Mount Rushmore State is hoping the Supreme Court will take up a case involving its remote seller compliance law. If it does, it could revisit its decision in Quill.

Quill Corp. v. North Dakota

In 1987, the Quill Corporation took issue with North Dakota’s claim that “regular or systematic solicitation of a consumer market in th[e] state” made it a North Dakota retailer. The state defined “regular or systematic solicitation” as making three or more advertisements within a 12-month period. At the time, the office supply company had approximately 3,000 customers, annual sales of $1,000,000, and no physical presence in North Dakota. Quill challenged the state’s assessment, and the case ended up at the Supreme Court in 1992.

The court’s decision in Quill cemented the physical presence standard held in previous rulings. As Quill notes, “These cases all involved some sort of physical presence within the State, and in Bellas Hess, the Court suggested that such presence was not only sufficient for jurisdiction under the Due Process Clause, but also necessary.” See National Bellas Hess v. Department of Revenue, 386 U.S. 753 (1967).

An ambivalent ruling with far-reaching consequences

Even while supporting the physical presence standard, Quill acknowledges that the court has come to the opposite conclusion in other decisions. In Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985), the court found that “jurisdiction … may not be avoided merely because the defendant did not physically enter the forum State.… [I]t is an inescapable fact of modern commercial life that a substantial amount of business is transacted solely by mail and wire communications across state lines, thus obviating the need for physical presence. … So long as a commercial actor’s efforts are ‘purposefully directed’ towards residents of another State, we have consistently rejected the notion that an absence of physical contacts can defeat personal jurisdiction there.… (Emphasis in original).”

This apparent contradiction hinges on the “different constitutional concerns and policies” of two constitutional clauses, the Due Process Clause and the Commerce Clause. Quill explains, “Due process centrally concerns the fundamental fairness of governmental activity. … In contrast, the Commerce Clause, and its nexus requirement, are informed … by structural concerns about the effects of state regulation on the national economy.”

In Quill, the desire to prevent a state regulation from jeopardizing the national economy takes precedence. The court found it beneficial to maintain a clear rule on nexus, particularly since “our law in this area is something of a quagmire.” The decision reads, “The continuing value of a bright line rule in this area and the doctrine and principles of stare decisis indicate that the Bellas Hess rule [i.e., the physical presence standard] remains good law.”

The court invites Congress to jump in

Still, the court gives itself an out: “This aspect of our decision is made easier by the fact that the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve.”

It speculates that Congress has rejected legislation that would effectively overrule the Bellas Hess ruling “out of respect for our holding … that the Due Process Clause prohibits States from imposing such taxes,” adding, “Today we have put that problem to rest. Accordingly, 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.”

Ecommerce multiplies Quill’s ramifications

If the Dakotas were concerned about non-collecting remote retailers in the 1980s, they are doubly so now. Ecommerce has multiplied the ramifications of the physical presence standard. According to Internet Retailer, U.S. web sales in 2016 reached $394.86 billion, or 11.7 percent of the nation’s total retail sales ($4.846 trillion). On Black Friday alone, ecommerce transactions exceeded $3.3 billion, of which mobile accounted for $1.2 billion. By comparison, mail order sales totaled approximately $35.5 billion in 1992.

Even though the largest ecommerce seller, Amazon, now collects and remits tax on its own sales in all sales tax states (it does not currently collect on its marketplace sales), thousands of ecommerce sellers do not. As a result, states are losing out on a tremendous amount of sales and use tax revenue. Although consumers are supposed to remit use tax directly to the state when the retailer didn’t collect tax at the point of sale, few do.

South Dakota challenges Quill

Despite multiple attempts and the Supreme Court’s invitation, Congress has failed to deal with the issue. Therefore, at least some members of the bench think the time has come for the court to readdress it.

In a concurring opinion in Direct Marketing Association v. Brohl, Justice Anthony Kennedy wrote, “Because of Quill and Bellas Hess, States have been unable to collect many of the taxes due on [ecommerce sales]. … [I]t is unwise to delay any longer a reconsideration of the Court’s holding in Quill. A case questionable even when decided, Quill now harms States to a degree far greater than could have been anticipated earlier. … It should be left in place only if a powerful showing can be made that its rationale is still correct.”

Several states, including Alabama, have answered that call, but South Dakota seems most likely to bring a challenge to Quill before the Supreme Court. To date, more than 15 organizations have urged the court to take up the case.

If it does, and if Quill is overturned, North Dakota will be one of many states to reap the benefits. The northern Dakota loses an estimated $30 to $40 million annually in sales and use tax revenue due to sales by non-collecting remote sellers, and due to the enactment of an economic nexus law earlier this year, it’s poised to tax remote sellers as soon as it’s granted the right to do so. Vindication at last.

Learn more about state efforts to tax remote sales at the Avalara Resource Center.


Avalara Author
Gail Cole
Avalara Author Gail Cole
Gail Cole began researching and writing about sales tax for Avalara in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.