Will the Case that Overrules Quill Mark the End of the Supreme Court’s Dormant Commerce Clause Jurisprudence?

Written by: Steve Estelle, Senior Consultant, Tax Specialty Services


A case challenging Quill’s physical presence test could have implications beyond states’ ability to compel collection of their sales tax.  If the Supreme Court overrules Quill’s Commerce Clause holding, the first prong of Complete Auto’s four-prong test for determining the validity of a state tax law under the “dormant” Commerce Clause (“substantial nexus”) will no longer have any meaning separate from the Due Process Clause’s “minimum connection,” and this could mark the beginning of the end of the Supreme Court’s dormant Commerce Clause jurisprudence.

In Quill v. North Dakota, the U.S. Supreme Court answered the question of whether a state can require an out-of-state seller to collect the state’s sales tax when the seller has no physical presence in the state.  In deciding that issue, the Court distinguished between two constitutional provisions—the Commerce Clause and the Due Process Clause.  The Court held that physical presence was required under the Commerce Clause but not under the Due Process Clause.

Quill was decided in 1992, and so much has changed since then (namely the rise in online sales and uncollected use tax revenue) that two or so years ago Justice Kennedy invited states to pass laws openly violating the Court’s holding in Quill v. North Dakota so the Court could “reconsider” Quill.  States obliged, and at least one (South Dakota) has made its way through lower courts and asked the Court for review.

If the Court overrules Quill, an interesting question will be whether there will remain any meaningful distinction between the Due Process Clause and Commerce Clause in determining whether a business has sufficient “nexus” with a state.  In my opinion, there won’t be, and the Court will either hold that the Commerce Clause doesn’t apply, or we’ll return to the time of Quill’s predecessor (Bellas Hess), when the Court couldn’t clearly articulate the difference between the two clauses.

In Bellas Hess, the Court set forth two tests to determine whether a state tax law was permissible—one under the Due Process Clause and one under the Commerce Clause—and it was difficult to tell them apart.  Under the Due Process Clause, the question was whether the state has given anything for which it can ask a return.  Under the Commerce Clause, the question was whether the tax was designed to make interstate commerce bear its fair share of local government costs.

Both questions seem to ask the same thing—did the business enjoy the protections or other benefits of local government—so to many people nexus under the Commerce Clause seemed like the same thing as nexus under the Due Process Clause.  Under these similar standards, the Bellas Hess Court held a state could not impose a duty to collect its sales tax on a seller with no physical presence in the state.

The facts and issues in Bellas Hess were essentially identical to those in a later case—Quill.  Rather than just affirming Bellas Hess, however, the Quill Court attempted to distinguish between the Due Process and Commerce Clause standards.  The Due Process Clause, it explained, concerns the fundamental fairness of governmental activity.  It requires a “minimum connection” between the state and the person, property, or transaction so as to give the person fair warning that the person’s activities might subject it to the state’s jurisdiction.  Under Due Process, the Court held, physical presence is not required.  So long as the person’s commercial efforts are purposefully directed toward residents of the state, the state has jurisdiction.  Thus, Quill overruled Bellas Hess’s Due Process holding.

The Commerce Clause, the Court stated, has a different purpose.  It seeks to prevent undue burdens on interstate commerce.  To do so, it requires “substantial nexus” between the person or activity and the state before the state can tax or compel the taxpayer to collect tax.  Under this standard, the Quill Court held, a state may compel a seller to collect the state’s sales tax only if the seller has physical presence in the state.

So, today the Due Process Clause requires “minimum connection,” the Commerce Clause requires “substantial nexus, and substantial nexus requires “more” connection than minimum connection—substantial nexus requires physical presence whereas minimum connection does not.  What happens to “substantial nexus,” though, if the Court overrules Quill and Bellas Hess and says physical presence is no longer required?  What’s the new standard?

The clear replacement appears to be economic presence.  Many of the recently enacted remote seller collection laws (like South Dakota’s) provide that a seller must collect the state’s sales tax if it has a threshold amount of in-state sales or number of transactions, and several state court decisions involving income tax nexus have referred to a taxpayer’s economic presence in the state.

If economic presence constitutes “substantial nexus,” then “substantial nexus” begins to look a lot like the Due Process Clause’s “minimum connection” and “purposeful direction.”  The question then is when does an out-of-state seller have economic presence in a state?

If I’m right, we’re back to where we were when Bellas Hess was decided, where the difference between Due Process and Commerce Clause nexus standards are largely indistinguishable.

If it overrules Quill, the Court could hold either that substantial nexus is the same as minimum connection or it could say nothing and leave us to wonder.  In either case, does this matter?  Yes.  If “substantial nexus” is the same as or at least isn’t distinguishable from “minimum connection,” it makes me wonder how much of the case that “created” substantial nexus (Complete Auto v. Brady) is still good law.

Complete Auto established the latest version of the Court’s Commerce Clause test and has been cited over and over.  Under Complete Auto, the Court will uphold a state tax law if it (1) is applied to an activity with a substantial nexus with the state, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services provided by the state.  If prong (1) is no longer meaningful, could this be the beginning of the end of Complete Auto’s four-part test?

Erosion of the Supreme Court’s dormant Commerce Clause jurisprudence is a real possibility because (1) there’s no textual basis for the Court’s decisions—the text of the Commerce Clause says only that Congress has the power to regulate interstate commerce and nothing else (this is why the Court sometimes refers to the “dormant” or “negative” Commerce Clause), (2) since at least 1888 the Court has regularly changed its Commerce Clause jurisprudence leaving a long string of overruled decisions, which it will be doing again if it overrules Quill and the remainder of Bellas Hess, and this has eroded the Court’s credibility in this area, (3) the Court isn’t “needed” in this area because Congress has the ultimate power to regulate interstate commerce and the cases the Court hears don’t have a big “injustice” factor, meaning, unless the Court steps in a huge injustice will occur, and (4) if a recent case reflects the Court’s current ideology (Maryland v. Wynne), we have a 5-4 split on a stronger vs. weaker dormant Commerce Clause, and three of the justices are near retirement (Kennedy, Breyer, and Ginsburg), two in the majority and one in the dissent.  A difference of one vote would flip the Court.

Thus, a case challenging Quill’s physical presence test could have implications beyond states’ ability to collect its sales tax. It could mark the point at which the U.S. Supreme Court began to dismantle its dormant Commerce Clause jurisprudence.


Questions or want more on this topic? Reach out to Steve today.