The bright-line physical presence nexus standard established by the US Supreme Court in Quill v. North Dakota, 504 U.S. 298 (1992) for sales and use tax purposes is under attack. Under this standard, a company must have a physical presence within a state in order for such state to constitutionally impose its sales or use tax upon that company. If such in-state physical presence does not exist, the imposition of tax is unconstitutional because it fails the “substantial nexus” requirement of the Commerce Clause. This has been the rule for the past 24 years, but now, in response to Justice Kennedy’s concurring opinion in Direct Marketing Association v. Brohl, Dkt. 13-1032 (U.S. 2015) advocating for a reconsideration of Quill, South Dakota and Alabama have enacted controversial sales and use tax nexus laws designed to directly conflict with the US Supreme Court’s holding in Quill. Both states have found companies willing to challenge them, including Newegg, Inc., a company that has been targeted by both states in their attempts to overturn Quill. For additional background on the events leading up to each state’s change, please refer to the prior Tax News and Developments article States on the Verge of a Nexus Showdown (Vol. 16, Issue 2, April 2016).

South Dakota Economic Nexus Law is the Subject of Two Lawsuits

On March 22, 2016, South Dakota Governor Dennis Daugaard signed S.B. 106 into law, which became effective May 1, 2016. Under S.B. 106, any out-of-state seller selling tangible personal property, products transferred electronically, or services for delivery in South Dakota has nexus with the state for sales tax purposes, if South Dakota gross revenues from the aforementioned sales exceed $100,000 or if the seller made 200 or more separate transactions for delivery in South Dakota. This standard is much lower than the Quill standard, as it can be satisfied by a seller that does not maintain a physical presence in South Dakota.

Prior to the May 1, 2016 effective date, the South Dakota Department of Revenue allegedly notified 206 out-of-state retailers that they had until April 25, 2016 to either register with the state or notify the state that they were exempt because they fell under the thresholds. On April 28, 2016, South Dakota filed an action for declaratory judgment pursuant to S.B. 106 in South Dakota Circuit Court against four online retailers that do not have a direct physical presence in South Dakota: Wayfair, Inc., Systemax, Inc.,, Inc., and Newegg, Inc. In its complaint, the state acknowledged that a ruling in its favor requires abrogation of Quill by the US Supreme Court.

The filing of South Dakota’s complaint automatically triggered an injunction of the enforcement of S.B. 106 in effect during the pendency of the action, “prohibiting any state entity from enforcing the obligation in section 1 of this Act [i.e., taxation pursuant to the S.B. 106 nexus standard] against any taxpayer who does not affirmatively consent or otherwise remit the sales tax on a voluntary basis.” S.B. 106 at § 3. If South Dakota ultimately prevails in its action, it may assess tax pursuant to the S.B. 106 nexus standard only on a prospective basis from the date the injunction is lifted or dissolved. Id. at § 6.

A mere day after the South Dakota Department of Revenue filed its suit, the American Catalog Mailers Association (“ACMA”) and NetChoice, trade associations representing catalog marketers and e-commerce retailers, respectively, also filed a complaint for declaratory judgment, seeking a determination that S.B. 106 is in direct violation of Quill and is unconstitutional under both the Commerce Clause and Due Process Clause of the US Constitution.

Alabama and the Newegg challenge

Alabama’s challenge to Quill is in the form of a regulation that became effective January 1, 2016. See Ala. Admin. Code 810-6-2.90.03. Pursuant to this regulation, out-of-state sellers without an Alabama physical presence are deemed to “have a substantial economic presence in Alabama for sales and use tax purposes and are required to register for a license with the Department and to collect and remit tax” when (1) such seller’s retail sales of tangible personal property to Alabama customers exceed $250,000 per year based on the previous year’s sales and (2) the seller conducts one of the activities enumerated in Ala. Code § 40-23-68 (e.g., soliciting orders of tangible personal property in Alabama by means of catalogs, commercials on cable television, or a telecommunication or television shopping system). Ala. Admin. Code 810-6-2.90.03(1).

Even though only a few reporting months have transpired since the new regulation became effective, the Alabama Department of Revenue has reportedly issued approximately 10 final sales and use tax assessments under the new economic nexus rule as of May 2016. Its efforts have not gone unnoticed. On June 9, 2016, Newegg, Inc. filed an appeal with the Alabama Tax Tribunal challenging Alabama’s economic nexus regulation on Commerce Clause nexus grounds.

Beyond the fact that Alabama’s economic nexus regulation is unconstitutional pursuant to Quill, Alabama’s application of an economic nexus standard for sales tax purposes raises significant questions of legitimacy because it came in the form of an administrative rule change by the Alabama Department of Revenue as opposed to legislative action. Administrative agencies are charged with administering the laws of a state, not creating new ones outside the scope of the state statutes or federal law. But that finer point of governance may be lost on the Alabama Department of Revenue, which issued a statement upon the filing of Newegg, Inc.’s appeal, stating that “In response to decades of Congressional inaction, the regulation was designed to directly challenge Quill v. North Dakota, a case decided by the US Supreme Court in the early 90s, and its requirement that a remote seller have physical presence in a state for the state to requires the seller to collect its tax.” The statement concludes with a quote from Alabama Revenue Commissioner Julie Magee, stating, “Until Congress acts, we will continue to lead the charge to overturn Quill.”

Possible US Supreme Court Review

Although both South Dakota and Alabama have their sights set on overturning Quill, they face significant hurdles to achieve their goal. Convincing the U.S. Supreme Court to grant a petition for certiorari could potentially be difficult notwithstanding Kennedy’s concurrence in DMA. Then, convincing the Court to overrule decades of established precedent in this area of the law, thereby violating the principle of and the Court’s strong inclination toward stare decisis, would prove even more difficult. It could be that Congress, and not the courts, will have the final say on the taxation of remote sales.

Contact the Author:Roman Patzner

This article was originally published in the June 2016 edition of Tax News and Developments (Volume XVI, Issue 3) and is available under