General Publications May 23, 2016

"Are Alabama, South Dakota Overeager to Challenge Quill?," Law360, May 23, 2016.

Extracted from Law360

The legacy of Quill Corp. v. North Dakota[1] is renowned. Through Quill, the U.S. Supreme Court upheld its ruling in National Bellas Hess and affirmed the bright-line physical presence standard for substantial nexus under the commerce clause, stating that “the continuing value of a bright line rule in this area [of sales and use tax] and the doctrine and principles of stare decisis indicate that the Bellas Hess rule remains good law.”[2] In his now oft-cited concurrence in Direct Marketing Association (DMA) v. Brohl, Justice Anthony Kennedy strongly suggested that it was time to reconsider the court’s decision in Quill.[3] In the conclusion of his concurrence, Justice Kennedy requested that the legal system “find an appropriate case for [the] Court to reexamine” this long-standing Quill precedent,[4] a remnant of bygone days that fails to take into account “the dramatic technological and social changes that [have] taken place in our increasingly interconnected economy” since that decision was handed down in 1992.

Now, several states appear ready to provide Justice Kennedy with his requested test case. However, it is likely that if such challenges to Quill come before the Supreme Court, stare decisis could once again operate to restrain the court from overturning Quill, and if it does, it is questionable whether the states challenging that decision will be better off for having done so.

In recent years, many states have begun seeking new ways around the physical presence standard for substantial nexus, perhaps as a reaction to the court’s unwillingness to reconsider Quill and decades of frustration with congressional inaction[5] in an era of ever-expanding online retailing. Specifically, Alabama and South Dakota are teeing up Supreme Court challenges to Quill by passing remote sales tax legislation that is inconsistent with the physical presence requirement.[6]

Alabama has chosen to not tiptoe around this issue and has delivered what is perhaps the most hostile challenge to Quill by promulgating Regulation 810-6-2-.90.03, which requires remote sellers to collect and remit use tax on sales to Alabama customers if they: (1) makes sales into the state exceeding $250,000 per year; and (2) have a substantial economic presence in Alabama because they conduct one or more of the activities specified in Ala. Code Ann. § 40-23-68.[7] Regarding this regulation, Alabama Deputy Revenue Commissioner Joe Garrett, Jr., has publicly stated that the department is “not running away from the fact that our rule is inconsistent with Quill,” and hopes to “lose the case very quickly and cleanly in state court to get our cert petition to the Supreme Court.” Interestingly, the department’s commissioner, Julie Magee, also recently tweeted, “All sorts of things were constitutional or unconstitutional until they weren’t anymore. Sue us.”[8]

South Dakota has also attempted to challenge Quill, albeit somewhat less brazenly, by passing remote sales tax legislation, Senate Bill 106, that is inconsistent with the physical presence requirement. The act requires sellers without a physical presence in the state to comply with the state’s sales tax laws as though the seller had a physical presence in the state.[9] The act also contains two threshold provisions that limit the effect of the compliance requirement on sellers who conduct relatively little business shipping goods and services to South Dakota residents. Specifically, sellers are required to comply who have: (1) “gross revenue from the sale of tangible personal property, any product transferred electronically, or services delivered into South Dakota” exceeding $100,000; or (2) “sold tangible personal property, any product transferred electronically, or services for delivery into South Dakota in [200] or more separate transactions.”[10]

However, recognizing that S.B. 106 is constitutionally problematic, the South Dakota Legislature has provided that enforcement of the provisions of the bill will be stayed until the constitutionality has been clearly established by a binding judgment, such as a decision from the U.S. Supreme Court. On April 28, 2016, South Dakota moved one step closer to that goal when it filed for declaratory judgment in the Sixth Circuit, naming four large retailers as defendants and seeking a determination that it may require the defendants to collect and remit sales tax on sales of tangible personal property and services for delivery into the state. The state has acknowledged that a declaration in its favor will require the abrogation of Quill and ultimately hopes to receive a decision from the Supreme Court to that effect.

Although states like Alabama and South Dakota are aggressively challenging Quill’s physical presence requirement through remote sales tax legislation, there are several likely impediments to achieving their goal. First, apart from Justice Kennedy’s concurrence in DMA, the court seems to have little appetite to accept a challenge to Quill — it has not done so in the 24 years since it issued that decision.

Second, overturning Quill is likely not as simple as just getting a case in front of the Supreme Court. Rather, any reconsideration of Quill is made more complex by the doctrine of stare decisis, which means “to stand by things decided” and, practically, refers to following prior court decisions absent unusual circumstances. Consider that when it was decided in 1992, Quill was heavily influenced by stare decisis and the reliance of an entire industry on the physical presence standard that was established in National Bellas Hess. In fact, Quill is replete with passages demonstrating the extent to which stare decisis played a key role in the outcome of the case, including the court’s recognition that “a bright line rule in the area of sales and use taxes also encourages settled expectations and, in doing so, fosters investment by businesses and individuals” and that “[t]he Bellas Hess rule has engendered substantial reliance and has become part of the basic framework of a sizeable industry.”[11] This was the case despite the court’s express recognition of the effect of substantial technological changes in the 25 years prior to Quill. Also consider that throughout the history of the court, it has been known to cite the principle, articulated by Justice Louis Brandeis in a dissenting opinion in 1932, that “[s]tare decisis is usually the wise policy, because in most matters it is more important that the applicable rule of law be settled than that it be settled right.”[12] Thus, even though practitioners have interpreted Justice Kennedy’s concurrence as an open invitation to challenge Quill, it is not a foregone conclusion that the entire court is now ready to overturn its well-established precedent, especially when to do so would require the court to act contrary to a deeply rooted judicial principle.

Moreover, in Quill, the court called upon Congress to resolve the issue of whether physical presence was still the appropriate nexus standard in the context of sales and use tax. This is important because throughout the history of the court, stare decisis has applied with special force in areas of the law where correction can still be had through legislation, a prospect that seems more likely than ever in light of the recent attempts to enact Congress’ Marketplace Fairness Act. Thus, if the court agreed to hear a challenge to Quill, it may be that stare decisis would now apply with even greater special force.

Some practitioners have even speculated that given the shifting makeup of the Supreme Court bench due to the recent passing of Justice Antonin Scalia, it might be taxpayers rather than state departments of revenue that would benefit from a Supreme Court challenge to Quill. Specifically, in his concurring opinion, Scalia agreed with the Quill court that the commerce clause holding of National Bellas Hess should not be overruled on the grounds of stare decisis, a doctrine that strongly influenced his opinions, despite his noted criticisms of dormant commerce clause jurisprudence.[13] Generally, however, Scalia often stood in the minority regarding state tax cases. In his absence, it is possible that the court will now be open to more expansive interpretations of the commerce clause and, thus, more restrictions on state taxation. Whether Scalia’s absence will mean that the court is more likely to grant a Quill challenge remains to be seen and could depend on many influences, such as a new justice, the enactment of federal legislation or a streamlined agreement among the states. Only time will tell.

If the Supreme Court does not grant cert to hear a challenge to Quill, those states challenging the physical presence requirement are likely no worse off, especially in light of recent federal cases such as Direct Marketing Association v. Brohl, No. 12-1175 (10th Cir. Feb. 22, 2016) (“DMA II”). In DMA II, the Tenth Circuit held that Colorado’s law requiring sellers without physical presence in the state to issue notices to Colorado customers regarding their tax obligations and to report to the state their sales to Colorado customers was constitutional. In a concurrence penned by Judge Neil Gorsuch, the judge stated that “Quill might be said to have attached a sort of expiration date for mail order and internet vendors’ reliance interests on Bellas Hess’s rule by perpetuating its rule for the time being while also encouraging states over time to find ways of achieving comparable results through different means.” As evidenced by Colorado’s and, more recently, Vermont’s enactment of a similar notification requirement, the states have certainly made efforts to implement “different means” of achieving comparable results to overturning Quill. Concurrently, large corporations are expending large sums to litigate against state laws that have been promulgated in direct contravention of Supreme Court precedent, and thus, those corporations are being forced to fund the states’ attacks on Quill. There is a strong argument to be made that such actions are “simply wrong as a matter of policy and state tax administration.”[14]

On the other hand, if the Supreme Court does grant cert to hear a direct challenge to Quill and once again decides not to overturn the case on the grounds of stare decisis, it would seem that the states are definitively stuck with Quill and the physical presence standard for nexus until Congress decides to make a move on this issue. Under the principle of stare decisis, courts are reluctant to change the rules of law that were established through their prior decisions and nearly always follow their own precedents while lower courts must follow precedents of higher courts such as the U.S. Supreme Court. Even Justice Scalia concurred with the Quill court on the grounds of stare decisis and cautioned that lower courts should follow Supreme Court precedent that has a direct application in a case even if it appears to rest on reasons rejected in other lines of cases. Only the U.S. Supreme Court has the authority to overturn its own decision. The possibility that the court will uphold Quill on the basis of stare decisis raises the question of whether the states should in fact be so eager to challenge to Quill.


[1] Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

[2] Quill Corp., 504 U.S. at 317 (1992); National Bellas Hess v. Dep’t of Revenue, 386 U.S. 753.

[3] Direct Marketing Ass’n v. Brohl, 135 S. Ct. 1124, 1135 (2015) (Kennedy, J., concurring).

[4] Direct Marketing Ass’n, 135 S. Ct. at 1135.

[5] In Quill Corp., the court noted that Congress holds the “ultimate power” and is “better qualified to resolve” the issue of “whether, when, and to what extent the States may burden interstate [retailers] with a duty to collect [sales and] use taxes.” Quill Corp., 504 U.S. at 318. However, Congress has yet to address this issue through federal legislation.

[6] See Ala. Admin. Code 810-6-2-.90.03(1)(b), (2); see also Senate Bill 106, 91st Session, South Dakota Legislature, 2016, “An Act to provide for the collection of sales taxes from certain remote sellers.”

[7] Ala. Admin. Code 810-6-2-.90.03(1)(a), (b).

[8] Eric Yauch, “Alabama DOR Commissioner and Attorney Spar Over Sales Tax Nexus,” Tax Analysts, Sept. 14, 2015.

[9] S.B. 106 §1.

[10] S.B. 106 §1(1)-(2).

[11] Quill Corp., 504 U.S. at 303, 317.

[12] Burnet v. Coronado Oil & Gas Co., 285 U.S. 393, 406 (1932) (Brandeis, J., dissenting). Of course, a dissenting opinion itself is not law. However, Justice Brandeis’ statement, “… it is more important that the applicable rule of law be settled than that it be settled right,” has since been quoted in 14 subsequent opinions of the U.S. Supreme Court. Moreover, his statement was first quoted with approval in a majority opinion in 1974 and 1976. Edelman v. Jordan, 415 U.S. 651, 671, n. 14 (1974) (majority opinion); Runyon v. McCrary, 427 U.S. 160, 175, n. 12 (1976).

[13] Quill Corp. v. North Dakota, 504 U.S. 298 (1992) (Scalia, J., concurring).

[14] Clark R. Calhoun & Matt P. Hedstrom, “Ask and Ye Shall Receive, Justice Kennedy: The Alabama DOR Has Proposed a Regulation to Challenge Quill,” IPT Insider, September 2015.

Meet The Author
Media Contact
Nicholas Clarke
Senior Communications Manager
Phone: 212.210.1222
This website uses cookies to improve functionality and performance. By continuing to browse this site, you are consenting to the use of cookies on this website. For details, see our Privacy Statement