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Wayfair and its Impact on Illinois’ Economic Nexus Legislation

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The Commerce Clause and interstate commerce were thrust into the spotlight last week, as the United States Supreme Court reversed the longstanding physical presence standard for sales tax nexus. As states and businesses begin to grapple with the ramifications of the Supreme Court’s decision in South Dakota v. Wayfair, Inc., et al,585 U.S. __ (2018), it will be important to assess each state’s nexus statutes and regulations in light of Justice Kennedy’s opinion. In this article, we will provide the context leading up to the Wayfair  decision and will focus specifically on how the decision may impact Illinois’ recently adopted economic nexus legislation.

“Substantial Nexus” and the Physical Presence Standard

Modern commerce clause precedent rests upon two primary principles that identify the boundaries of a state’s authority to regulate interstate commerce: (1) state regulations may not regulate interstate commerce; and (2) states may not impose burdens on interstate commerce. As set forth by the Court in Complete Auto Transit, Inc. v. Brady, the Court will sustain a tax so long as it (1) applies to an activity with a substantial nexus with the taxing State, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services the state provides. 430 U.S. 274 (1977).

The Supreme Court has steadily required that a taxpayer have physical presence in a state in order to be required to collect and remit state sales or use tax. National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967). In Bellas Hess, the Supreme Court addressed whether Illinois could require out-of-state retailers to collect and remit taxes on sales made to consumers who purchased goods for use within Illinois. Because the mail-order company’s “only connection with customers in the State [wa]s by common carrier or the United States mail” the Court held it lacked the requisite minimum contacts required by the state under both the Due Process and the Commerce Clause. 758. Without a physical presence, such as “retail outlets, solicitors, or property within a State”, the state lacked the power to require that retailer to collect a local use tax.Id.

Over 25 years later, the Court reexamined the physical presence rule in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Similarly, North Dakota attempted to require an out-of-state mail-order house that had neither outlets nor sales representatives in the state to collect and pay a use tax on goods purchased for use within the 301. Whereas Bellas Hess linked the due process and commerce clause together in setting forth the physical presence requirement, Quill held that while the Commerce Clause does require physical presence, the Due Process Clause does not. 307-308, 317-318.  Applying Complete Auto, the Court grounded the physical presence rule in the “substantial nexus” requirement of the Commerce Clause set forth by Complete 311. Because the physical presence requirement was entirely grounded in the Commerce Clause, congress remained free to establish a different standard if it 301.

Physical Presence Under Fire

Although the physical presence rule has served as guiding precedent since the Court’s decision in Quill, it has not been without criticism. For example, over 20 states adopted “click-through” or “affiliate marketing relationships program” nexus legislation, including New York in 2013 and later Illinois. See e.g.,N.Y. Tax Law Ann. §1101(b)(8)(vi); 86 Ill. Admin. Code 150.201. Under New York’s statute, a seller is presumed to be a taxable vendor if it entered into an agreement with a resident of New York, the resident refers customers to the vendor’s website by a link, internet, website, or other digital means, and the internet retailer generates more than $10,000 through its referrals during the last four quarterly sales tax periods. Id.

Two internet retailers, and, challenged New York’s click-through nexus statute as violating the Due Process and Commerce Clauses of the Constitution. However, the New York Court of Appeals upheld the law as facially constitutional, finding that although physical presence is generally necessary for sales tax nexus, “it need not be substantial,” and can be met if economic activities are performed in the state by a seller on behalf of the taxpayer., Inc. v New York State Dept. of Taxation & Fin., 20 N.Y.3d 586, 595 (2013). Laying the groundwork for future challenges to the physical presence rule, the New York Court of Appeals emphasized that “[a]ctive, in-state solicitation that produces a significant amount of revenue qualifies as ‘demonstrably more than a slightest presence.'”  Id. Ultimately, however, the Supreme Court denied an opportunity to review the constitutionality of New York’s click-through nexus laws.

Other jurisdictions have sought to foil the physical presence requirement from a different direction, such as Colorado, by imposing notice and reporting requirements on out-of-state retailers that fall shy of actually collecting and remitting the tax. See, Colo. Rev. Stat. §39-21-112(3.5)) (C.O. 2010) (H.B. 10-1193). Colorado’s statute and accompanying regulations require that sellers with gross sales to Colorado customers in excess of $100,000, but who did not collect Colorado sales tax on these purchases, must perform the following: (1) provide transactional notices to Colorado customers, informing them sales or use tax is due on an applicable return; (2) send annual purchase reports to Colorado customers with more than $500 in annual purchases; and (3) annually report the Colorado purchaser information to the Colorado Department of Revenue. Id.; Colo. Code Reg. § 39-21-112. In 2015, the Court addressed a different question in that case, but Justice Kennedy, who joined the majority in Quill, stole the show by jumping the aisle and inviting a reconsideration of Quill:

Given these changes in technology and consumer sophistication, it 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.

Direct Mktg. Ass’n v.Brohl, 135 U.S. 1124, 1135 (2015).  On remand, the Tenth Circuit, in an opinion joined by then Circuit Court Judge Gorsuch, upheld Colorado’s use tax reporting legislation. Direct Mktg. Ass’n v. Brohl, 814 F.3d 1129, 1148-1151 (2016). And with those resounding words, the stage was set.

States on the Offense: Economic Nexus Legislation

As a result of the criticism surrounding Quill, several states, including Alabama and South Dakota, took efforts directly challenging the physical presence rule set forth by Quill. Specifically, Alabama enacted a regulation, Rule 810-6-2-.90.03, effective January 1, 2016, which specifies that sales tax collection and remittance requirements are triggered when a seller’s gross revenues from sales of tangible personal property sold into the state exceed $250,000 in the previous calendar year, and the seller conducts one or more of the activities described in Ala. Code Sec. 40-23-68.

Similarly, in March 2016, to combat the South Dakota Department of Revenue’s inability to collect sales from remote sellers and what the state declared an “emergency”, the South Dakota legislature enacted Senate Bill 106 – “An Act to provide for the collection of sales taxes from certain remote sellers, to establish certain Legislative findings, and to declare an emergency.” S. 106, 2016 Leg. Assembly, 91st Sess. (S.D. 2016) (SB 106) (the “Act”). The Act requires out-of-state sellers to collect and remit sales tax “as if the seller had a physical presence in the state” and applies only to sellers that, on an annual basis, deliver more than $100,000 of goods or services into the state or engage in 200 or more separate transactions for the delivery of goods or services into the state. Id.   This legislation led to the U.S. Supreme Court’s decision in Wayfair.

Analyzing Wayfair and a New Nexus Standard

Because South Dakota conceded the Act cannot survive under Bellas Hess and Quill, the goal was to propel the legislation to the Supreme Court as a direct challenge to Quill. South Dakota achieved this objective by cherry-picking three online merchants with no employees or real estate in South Dakota for litigation: Wayfair, Inc.,, Inc., and Newegg Inc. Wayfair, Inc.,585 U.S. at *3. Each of these three companies shipped a substantial amount of goods directly to purchasers throughout the United States, including South Dakota, but were not collecting South Dakota sales tax.

Holding in favor of South Dakota, the Court found the physical presence rule established by Quill is “unsound and incorrect” and remanded the case to resolve any remaining claims regarding the application of the Commerce Clause in the absence of Quill and Bellas HessId.   at *22. In its evaluation of the physical presence rule, the Court in Wayfairconcluded that Quill has “come to serve as a judicially created tax shelter” for businesses that limit their physical presence and still sell their goods and services into a state. Id. at *13. Consequently, the Court explained that nexus is instead established when the taxpayer “avails itself of the substantial privilege of carrying on business in that jurisdiction.” Id. at *22 (citing Polar Tankers, Inc. v. City of Valdez, 557 U.S. 1, 11 (2009)).

In support of the Supreme Court’s new Commerce Clause nexus standard, the Court referred to Polar Tankers. That case addressed whether an Alaskan city was entitled to impose a personal property tax on the value of ships traveling through the city.  Although the tax was struck down on other grounds, the Court noted that a “[n]ondomiciliary jurisdiction may constitutionally tax property when that property has a ‘substantial nexus’ with that jurisdiction, and such a nexus is established when the taxpayer ‘avails itself of the substantial privilege of carrying on business’ in that jurisdiction.” Polar Tankers, Inc., 557 U.S. at 1.  The taxpayer in that case had at least twenty-eight ships that were in port in the city.  Thus, Polar Tankers involved substantial physical contacts with the taxing jurisdiction.

Polar Tankers quoted Mobil Oil Corp. v. Comm’r of Taxes, 445 U.S. 425 (1980).  That case hinged on whether Vermont could constitutionally tax the Vermont taxpayer’s net dividends from subsidiaries and affiliates operating abroad. Id. at 427.  The Court explained that

For a State to tax income generated in interstate commerce, the Due Process Clause of the Fourteenth Amendment imposes two requirements: a ‘minimal connection’ between the interstate activities and the taxing State, and a rational relationship between the income attributed to the State and the intrastate values of the enterprise. [§] The requisite ‘nexus’ is supplied if the corporation avails itself of the ‘substantial privilege of carrying on business’ within the State; and ‘the fact that a tax is contingent upon events brought to pass without a state does not destroy the nexus between such a tax and transactions within a state for which the tax is an exaction.

Id. at 436-37.  The Mobil Oil Court’s characterization of nexus was thus focused on whether the state could constitutionally include the net dividends in apportionable income, and was not really focused at all on whether the taxpayer, which was engaged in the production, refining, transportation, and distribution and sale of petroleum and petroleum products in many states, including Vermont, was subject to tax.

Although the Supreme Court remanded Wayfair to the Supreme Court of South Dakota on the basis that the Court’s decision was limited solely to the question of whether the Quillphysical presence standard was fatal to SB 106, the Court provided a number of characteristics of South Dakota’s law that counseled in favor of upholding the law on remand.  These factors include:

  1. By asserting nexus only over sellers who deliver either $100,000 of goods or services or 200 or more separate transactions into the state, the Act applies a “safe harbor to those who transact only limited business in South Dakota”;
  2. The Act ensures that no obligation to remit the sales tax may be applied retroactively;
  3. South Dakota is one of more than 20 states that have adopted the Streamlined Sales and Use Tax Agreement (“SSUTA”); and
  4. South Dakota also provided sellers access to sales tax administration software paid for by the state that immunizes sellers from audit liability regarding their reliance on the software. *23.

The Wayfair Court did not provide any bright line rules to assist in determining whether a state statute satisfies the requirements of the Commerce Clause.  Instead, the Court explained that “Commerce Clause jurisprudence has ‘eschewed formalism for a sensitive, case-by-case analysis of purposes and effects.'” Id. at *13 (quoting West Lynn Creamery, Inc. v. Healy, 512 U.S 186 (1994)). Thus, when assessing the constitutionality of a state’s assertion of nexus prospectively, courts will review the facts on a case by case basis, undoubtedly aided by the four factors identified by the Supreme Court which indicate a tax does not burden interstate commerce.

Illinois’ Economic Nexus Legislation

Public Act 100-0587

In June 2018, the Illinois General Assembly enacted Public Act 100-0587.  Among many other changes, the General Assembly broadened the definition of “Retailer Maintaining a Place of Business” contained in 35 ILCS 105/2.  Specifically, the statute states that beginning October 1, 2018, a retailer making sales of tangible personal property to purchasers in Illinois from outside Illinois is considered to be maintaining a place of business in Illinois if: (A) the cumulative gross receipts from sales of tangible personal property to purchasers in Illinois are $100,00 or more; or (B) the retailer enters into 200 or more separate transactions for the sale of tangible personal property to purchasers in Illinois.  PA 100-0587, p. 472.

In order to determine whether a seller meets the thresholds set forth in the Act, the retailer must determine on a quarterly basis whether it meets either of the quantitative criteria.  If the retailer meets the criteria for a 12-month period, it is considered a retailer maintaining a place of business in Illinois and is required to collect and remit the tax imposed.  As the end of that 12-month period, the retailer must review its sales to Illinois customers on an annual basis to confirm that its sales exceed the thresholds provided by the Act.

Impact of Wayfair on PA 100-0587

In the wake of Wayfair, a retailer must still have “substantial nexus” with a state to be required to collect and remit sales or use tax on sales to customers in that state.  The restrictions of the Due Process Clause, that the foreign corporation purposefully avail itself of the benefits of an economic market in the forum state, remain. See Quill, 504 U.S. at 306 (quoting Burger King v. Rudzewicz, 471 U.S. 462 (1985). The Commerce Clause continues to limit taxing jurisdiction as well, requiring that a retailer “‘avails itself of the substantial privilege of carrying on business’ in that jurisdiction.” South Dakota v. Wayfair, al,   585 U.S. 1, 22 (2018) (quoting Polar Tankers, Inc. v. City of Valdez, 557 U.S. 1, 11 (2009)), but it no longer requires a retailer to have physical presence in a jurisdiction in order to be subject to the tax collection and remittance obligations imposed by the state.

Here, it remains to be seen how the South Dakota Supreme Court will analyze South Dakota SB 106 in light of the Wayfair decision.  However, Justice Kennedy’s opinion makes it fairly clear that the Court believes SB 106 should pass constitutional muster.  The more Illinois PA 100-0587 overlaps with the South Dakota legislation, then, the more likely it is that Illinois’ economic nexus legislation will also survive scrutiny.

First, Illinois adopts identical thresholds to South Dakota for purposes of determining whether substantial nexus exists.  Just like South Dakota, Illinois requires that a seller either make $100,000 in sales or conduct 200 separate transactions with Illinois customers.  The statute, moreover, is prospective only, requiring sellers to begin collecting in October 2018.

Illinois, however, is not a SSUTA member and it does not provide the type of safe harbor software that SSUTA states provide.  Although Wayfair does not mandate that a state be a SSUTA member, this is a noteworthy distinction from the South Dakota law and will require deeper analysis into the extent to which complying with Illinois’ unique ROT rules burdens interstate commerce.  However, as the Court made clear, it is important to analyze state laws and the facts of each case on a case by case basis.

Previous Supreme Court case law (such as Polar Tankers or Mobil Oil) does not provide much meaningful insight into whether an entity may be subject to tax or tax collection and remittance obligations in a particular state when it lacks physical presence.  However, the $100,00 sales or 200 transactions thresholds appear to have received the Supreme Court’s stamp of approval.  Nonetheless, Illinois’ assertion of nexus will be required to be reviewed on a case-by-case basis and no bright line test exists to determine whether the imposition of a state statute will survive Commerce Clause scrutiny. West Lynn Creamery, 512 U.S. at 201.  Each instance where the state attempts to assert jurisdiction to tax should be reviewed for whether assertion of nexus either discriminates against or otherwise burdens interstate commerce, notwithstanding its adoption of the South Dakota bright line thresholds. This is no easy task, and will require a case-by-case analysis of each taxpayer’s facts and connections to the state.

Please reach out to Samantha K. Breslow with any questions.


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