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Post Wayfair: The Unconstitutionality of Kansas’s Taxation of Online Retailers [South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018).]

Kayla K. Dieker | November 11, 2020 | PDF Version (165 KB)

Summary: The United States Supreme Court, in its Wayfair decision, changed the way states tax online retailers. The Court overruled its prior physical presence requirement and, instead, held South Dakota had authority to tax retailers who exceed $100,000 in gross revenue or have more than 200 transactions in a calendar year. However, the Court was unclear about what quantity of business constitutes a substantial nexus. The Kansas Department of Revenue, in its Notice 19-04, likely does not satisfy the substantial nexus test because it does not include a safe harbor for online retailers doing small quantities of business in Kansas.

Preferred Citation: Kayla K. Dieker, Post Wayfair: The Unconstitutionality of Kansas’s Taxation of Online Retailers, 60 Washburn L.J. Online 19 (2020),

I. Introduction

As online retail becomes more popular, states often have a difficult time properly collecting taxes on those sales.[1] In the year 2000, e-commerce amounted to $27.61 billion in revenue.[2] That number jumped to $519.6 billion in 2018—eleven percent of total retail sales in the United States.[3] Additionally, in 2018, the third largest retailer in the United States was Amazon, a primarily online company.[4] This ranking was a four position increase from the prior year.[5]

The explosion in online retail left both states and the courts questioning how to properly tax these businesses.[6] Previously, the United States Supreme Court used the physical presence requirement to determine whether a state was authorized to tax an online retailer,[7] causing states to lose revenue.[8] However, in South Dakota v. Wayfair, Inc.,[9] the Supreme Court abandoned the physical presence test and instead adopted the substantial nexus requirement.[10] Although the substantial nexus requirement helps clarify when states are authorized to tax online retailers, there is still some confusion—especially surrounding the amount of contact needed to satisfy the test.[11] The Kansas Department of Revenue, in Notice 19-04, likely does not satisfy the test, because it creates a broad requirement for all online retailers to register, collect, and remit applicable sales and use tax.[12] The Supreme Court should revisit this issue and clarify the contacts needed to establish a substantial nexus.

II. Background

A. South Dakota v. Wayfair, Inc.

South Dakota filed suit against Wayfair, Inc.,, Inc., and Newegg, Inc. to enforce compliance with state law requiring companies to collect sales tax on internet sales, despite the companies’ lack of physical presence in South Dakota.[13] This law, passed in 2016, required out-of-state sellers to “comply with South Dakota’s sales tax laws ‘as if the seller had a physical presence in the state.’”[14] The law excluded sellers who did not exceed $100,000 in gross revenue and did not have more than 200 transactions in a calendar year.[15] The respondents, who had not collected South Dakota sales tax prior to the law passing, did significant business in the state.[16] Both the trial court and state supreme court granted summary judgment for the sellers.[17] However, the South Dakota Supreme Court noted the importance of the U.S. Supreme Court addressing this issue and the need to overturn the physical requirement rule.[18] The U.S. Supreme Court agreed and granted certiorari “to reconsider the scope and validity of the physical presence rule mandated by [prior] cases.”[19]

B. Legal Background

In 1992, the U.S. Supreme Court first addressed the issue of collecting use tax from out-of-state retailers in Quill Corp. v. North Dakota.[20] In Quill, North Dakota attempted “to require an out-of-state mail-order house that has neither outlets nor sales representatives in the State to collect and pay a use tax.”[21] This violated a previous U.S. Supreme Court decision—National Bellas Hess, Inc. v. Department of Revenue of Illinois.[22] In Bellas Hess, the U.S. Supreme Court held a similar statute violated the Due Process Clause by burdening interstate commerce.[23] In examining the statute in question in Quill, the Supreme Court of North Dakota declined to follow the Bellas Hess decision, “because ‘the tremendous social, economic, commercial, and legal innovations’ of the past quarter-century” made that decision obsolete.[24] The U.S. Supreme Court, though agreeing “with much of the [North Dakota] state court’s reasoning,” declined to overturn Bellas Hess.[25]

Instead, the U.S. Supreme Court held that North Dakota’s tax was unconstitutional.[26] The Court examined both the Due Process Clause and the Commerce Clause and found that “while a State may, consistent with the Due Process Clause, have the authority to tax a particular taxpayer, imposition of the tax may nonetheless violate the Commerce Clause.”[27] First, the Court acknowledged that the Due Process Clause requires both minimum contacts between the taxing state and the transaction and also that “income attributed to the State for tax purposes must be rationally related to ‘values connected with the taxing State.’”[28] Ultimately, the Court held that the Due Process Clause did not bar North Dakota’s tax, because Quill “purposefully directed” advertisements and sales to North Dakotans and the tax was “related to the benefits Quill receive[d] from access to the State.”[29]

The Court’s problem with the tax in Quill arose from the Commerce Clause.[30] The Court analyzed North Dakota’s law using the four-part Complete Auto test, created by the U.S. Supreme Court in 1977.[31] Under Complete Auto, the Court sustains taxes against a Commerce Clause challenge so long as the tax “(1) is applied to an activity with a substantial nexus to the taxing State, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services provided by the State.”[32] North Dakota argued that the Due Process minimum contacts test and the Commerce Clause substantial nexus test are one and the same.[33] However, the U.S. Supreme Court disagreed and found that the Commerce Clause substantial nexus test is not concerned with fairness for the defendant but instead with “structural concerns about the effects of state regulation on the national economy.”[34] Thus, the Commerce Clause “prohibits discrimination against interstate commerce.”[35]

In light of this, the U.S. Supreme Court reversed the North Dakota Supreme Court’s judgment and expressly declined to overturn its previous decision in Bellas Hess.[36] Instead, the Court indicated that the bright-line physical presence requirement in Bellas Hess “remain[ed] good law.”[37]

The U.S. Supreme Court addressed this issue again in Direct Marketing Association v. Brohl.[38] The opinion, specifically Justice Kennedy’s concurrence, prompted South Dakota’s actions in South Dakota v. Wayfair, Inc.[39] Brohl examined a law passed by Colorado that required retailers that were not collecting sales or use tax to notify customers of their use-tax liability.[40] Because of the Court’s negative Commerce Clause precedent created in Bellas Hess and Quill, states were unable to require retailers without a physical presence in the state to collect sales tax on their behalf.[41] This required Colorado customers “to fill out a return and remit the taxes to the Department [of Revenue] directly.”[42] However, consumer compliance with this requirement was low, and Colorado lost a significant amount of tax revenue.[43] Thus, Colorado passed the notice requirement.[44]

Direct Marketing Association, a trade association of businesses that market directly to consumers and often do not have physical presence in Colorado, asserted that the law “(1) discriminate[d] against interstate commerce and (2) impose[d] undue burdens on interstate commerce, all in violation of [the Supreme Court’s] negative Commerce Clause precedents.”[45] The district court granted partial summary judgment to the defendant.[46] Colorado appealed, and the Tenth Circuit reversed, holding that the district court lacked jurisdiction because of the Tax Injunction Act (“TIA”).[47] The Supreme Court granted certiorari and reversed the Tenth Circuit decision, holding that the relief sought by Direct Marketing Association would not “enjoin, suspend or restrain the assessment, levy or collection of any tax.”[48]

In his concurrence, Justice Kennedy acknowledged the need for the Court to reevaluate Quill.[49] He cited the growing prevalence of online businesses and how, because of this, states are often unable to collect use taxes.[50] Justice Kennedy opined that the Court should have reevaluated the physical presence requirement in Quill because of the increasing impact of technology on the economy.[51] He also noted that e-commerce sales were more than seventeen times what they were when the Court decided Quill.[52] Further, Justice Kennedy recognized:

Although online businesses may not have a physical presence in some States, the Web has, in many ways, brought the average American closer to most major retailers. A connection to a shopper’s favorite store is a click away—regardless of how close or far the nearest storefront. Today buyers have almost instant access to most retailers via cell phones, tablets, and laptops. As a result, a business may be present in a State in a meaningful way without that presence being physical in the traditional sense of the term.[53]

It is this realization that led to the Court’s decision in Wayfair.[54]

III. Court’s Decision

The Court in Wayfair decided to overturn its decisions of both Bellas Hess and Quill.[55] It recognized that “[i]t is estimated that Bellas Hess and Quill cause the States to lose between $8 and $33 billion every year.”[56] It is this inequity that led South Dakota to enact its law in the first place.[57] The South Dakota Supreme Court recognized that the South Dakota law, according to case law at the time, was unconstitutional.[58] However, South Dakota also recognized the importance of revisiting that case law.[59] The U.S. Supreme Court agreed.[60]

The Supreme Court began its analysis by examining the history of the Commerce Clause.[61] It acknowledged that “[m]odern precedents rest upon two primary principles that mark the boundaries of a State’s authority to regulate interstate commerce. First, state regulations may not discriminate against interstate commerce; and second, States may not impose undue burdens on interstate commerce.”[62] It was this framework that led the Court to adopt the Complete Auto test and the physical presence requirement in Bellas Hess.[63] In Quill, the Court went on to reaffirm the physical presence requirement.[64]

It was only after twenty-six years that the Court recognized Quill and the physical presence rule were flawed.[65] The Court noted “[e]ach year, the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the States.”[66] Because of this, the Court found the physical presence rule “is an incorrect interpretation of the Commerce Clause.”[67] It held that laws such as South Dakota’s—which requires retailers with at least 200 transactions or $100,000 in sales to collect and remit use tax—satisfy the substantial nexus requirement.[68]

IV. Commentary

On August 1, 2019, the Kansas Department of Revenue released Notice 19-04, which outlines “Sales Tax Requirements for Retailers Doing Business in Kansas.”[69] The Notice, released in response to Wayfair, “is intended to provide guidance to sellers doing remote business in Kansas.”[70] Per the Notice, which became effective on October 1, 2019, Kansas “require[s] on-line and other remote sellers with no physical presence in Kansas to collect and remit the applicable sales or use tax on sales delivered into Kansas.”[71] Further, sellers must register with the Department of Revenue.[72] Notably, the Notice does not outline any minimum sales requirements but, instead, simply states “any retailer who has any other contact with this state” must register, collect, and remit applicable sales and use tax.[73]

Comparing this Notice to the law reviewed by the Court in Wayfair, this action by Kansas is likely unconstitutional.[74] Although the Court in Wayfair eliminated the physical presence requirement, the Commerce Clause still requires out-of-state retailers to have a “substantial nexus” to the taxing state.[75] In Wayfair, the Court acknowledged that South Dakota—and therefore any other state—has the authority to tax out-of-state retailers if the tax applies to tangible property, intangible property (e.g., electronic products), and services delivered into the state.[76] However, there must also be a “substantial nexus with the taxing State” in order for the State to require sellers to collect and remit those taxes.[77] In Wayfair, the Court explained that South Dakota’s law establishes a substantial nexus because of the requirement for 200 transactions or $100,000 in sales.[78]

Unfortunately, the Court did not define any specific minimum for sales or transactions for state law to comply with the Commerce Clause.[79] Nevertheless, it did note the significance of South Dakota’s safe harbor for retailers that conduct limited business within the state.[80] Seeing that the Court specifically acknowledged this safe harbor, it seems likely that there is a requirement for some form of protection for retailers who conduct limited business within a state.[81] Kansas’s broad requirement for all retailers to collect and remit sales and use tax, regardless of contact with the state, likely does not meet the substantial nexus requirement—thus, making Kansas’s actions unconstitutional.[82] To comply, Kansas needs to indicate some sort of safe harbor for retailers who do limited business in the state.[83] Looking to Wayfair, South Dakota’s requirement for either 200 transactions or $100,000 in sales is acceptable.[84] However, it is unknown whether that limit is the minimum required or whether the Court would accept a different threshold—such as 100 transactions or $50,000 in sales.[85] Regardless, it is clear that, with the U.S. Supreme Court’s focus on the safe harbor within South Dakota’s law, Kansas’s lack of a requirement violates the Wayfair decision.[86]

V. Conclusion

The Supreme Court’s decision in Wayfair helped clarify much confusion.[87] The Court abandoned the physical presence requirement and brought the negative Commerce Clause into the Twenty-First Century with the substantial nexus test.[88] Yet, some confusion remains.[89] States, including Kansas, are still uncertain just how much in-state contact an online retailer must have in order for the state to be authorized to require that retailer to collect and remit applicable sales and use tax.[90] In order to truly know if the Kansas Department of Revenue unconstitutionally enacted Notice 19-04, the U.S. Supreme Court must readdress and clarify the issue.[91]


1. See South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018). [Return to Text]

2. Total and E-commerce Value of U.S. Retail Trade Sales from 2000-2018, Statista (Apr. 20, 2020), []. [Return to Text]

3. Id. [Return to Text]

4. Jessica Tyler, These Are the 20 Biggest Retailers in America, Bus. Insider (Aug. 13, 2018, 4:56 PM), [].  Amazon did $102.96 billion in revenue.  Id.  Coming in first and second were Walmart and Kroger.  Id. [Return to Text]

5. David P. Schulz, 2018 Top 100 Retailers, Nat’l Retail Fed’n (June 28, 2018), []. [Return to Text]

6. See Wayfair, 138 S. Ct. 2080; Quill Corp. v. North Dakota, 504 U.S. 298 (1992); Direct Mktg. Ass’n v. Brohl, 575 U.S. 1 (2015). [Return to Text]

7. See Quill, 504 U.S. 298; Direct Mktg., 575 U.S. 1; Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977); Nat’l Bellas Hess, Inc. v. Dep’t of Revenue of Ill., 386 U.S. 753 (1967). [Return to Text]

8. See Wayfair, 138 S. Ct. at 2080. [Return to Text]

9. Wayfair, 138 S. Ct. 2080. [Return to Text]

10. Id. at 2099. [Return to Text]

See id. [Return to Text]

12. See Kan. Dep’t of Revenue, Notice 19‑04, Sales Tax Requirements for Retailers Doing Business in Kansas (Aug. 1, 2019), []. [Return to Text]

13. South Dakota v. Wayfair, Inc., 229 F. Supp. 3d 1026, 1028 (D.S.D. 2017). [Return to Text]

14. Id. [Return to Text]

15. Wayfair, 138 S. Ct. at 2089. [Return to Text]

16. Id.  Wayfair, Inc. and, Inc. had a combined net revenue of $6.4 billion in 2017.  Id. [Return to Text]

17. Id. at 2084.  The respondents argued that the Act was unconstitutional.  Id.  Respondents later argued to the United States Supreme Court to “retain a rule that allows their customers to escape payment of sales taxes.”  Id. at 2096.  The Court strongly disagreed, admonishing respondents for the “subtle offer to assist in tax evasion.”  Id. (“According to respondents, it is unfair to stymie their tax-free solicitation of customers.  But there is nothing unfair about requiring companies that avail themselves of the States’ benefits to bear an equal share of the burden of tax collection.”). [Return to Text]

18. Id. at 2089.  The South Dakota Supreme Court opined, “[h]owever persuasive the State’s arguments on the merits of revisiting the issue, Quill has not been overruled and remains the controlling precedent on the issue of Commerce Clause limitations on interstate collection of sales and use taxes.”  Id. (quoting State v. Wayfair, Inc., 901 N.W.2d 754, 761 (S.D. 2018)). [Return to Text]

19. Id. at 2088. [Return to Text]

20. Quill Corp. v. North Dakota, 504 U.S. 298 (1992). [Return to Text]

21. Id. at 301. [Return to Text]

22. Nat’l Bellas Hess, Inc. v. Dep’t of Revenue of Ill., 386 U.S. 753 (1967). [Return to Text]

23. Quill, 504 U.S. at 301.  The Illinois statute in question in Bellas Hess required any retailer “[e]ngaging in soliciting orders within this State from users by means of catalogues or other advertising, whether such orders are received or accepted within or without this state” to collect and pay tax to the Illinois Department of Revenue.  Bellas Hess, 386 U.S. at 755 (quoting 120 Ill. Rev. Stat. § 439.2 (1965)).  The statute further required retailers to “keep such records, receipts, invoices and other pertinent books, documents, memoranda and papers as the [Department] shall require.”  Id. (quoting § 439.2).  Retailers that did not abide by the statute could face a fine up to $5,000 or six months imprisonment.  Id. [Return to Text]

24. Quill, 504 U.S. at 301. [Return to Text]

25. Id. at 302. [Return to Text]

26. Id. at 311. [Return to Text]

27. Id. at 305. [Return to Text]

28. Id. at 306. [Return to Text]

29. Id. at 308. [Return to Text]

30. Id. at 309. [Return to Text]

31. See Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977); Quill, 504 U.S. at 311. [Return to Text]

32. Quill, 504 U.S. at 311 (quoting Complete Auto, 430 U.S. at 279). [Return to Text]

33. Id. [Return to Text]

34. Id. at 311–12. [Return to Text]

35. Id.  The Court further explained the Complete Auto test limits “the reach of state taxing authority so as to ensure that state taxation does not unduly burden interstate commerce.”  Id. at 313.  Because of this, the Commerce Clause substantial nexus test, unlike the due process minimum contacts requirement, is not about notice but about “limiting state burdens on interstate commerce.”  Id. [Return to Text]

36. Id. at 318–19. [Return to Text]

37. Id. at 318. [Return to Text]

38. Direct Mktg. Ass’n v. Brohl, 575 U.S. 1 (2015). [Return to Text]

39. South Dakota v. Wayfair, Inc., 229 F. Supp. 3d 1026, 1028 (D.S.D. 2017).  Direct Marketing was decided twenty‑three years after Quill. [Return to Text]

40. Direct Mktg., 575 U.S. at 4.  Colorado customers were then required to report that information to the Colorado Department of Revenue. [Return to Text]

41. Id.; see Quill, 504 U.S. 298. [Return to Text]

42. Direct Mktg., 575 U.S. at 5. [Return to Text]

43. Id.  This lost tax revenue became more apparent as Internet retailers gained popularity.  Id.  Approximately 25 percent of taxes on Internet sales went unpaid, leading to an estimated $20 million in lost revenue each year.  Id. [Return to Text]

44. Id. at 6. [Return to Text]

45. Id. at 6–7. [Return to Text]

46. Id. at 7. [Return to Text]

47. Id.  “[T]he TIA [Tax Injunction Act] provides that federal district courts ‘shall not enjoin, suspend, or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.’”  Id. (quoting 28 U.S.C. § 1341 (2020)). [Return to Text]

48. Id. [Return to Text]

49. Id. at 16 (Kennedy, J., concurring). [Return to Text]

50. Id.  Use taxes “are the equivalent of sales taxes for out-of-state purchases.”  Id. [Return to Text]

51. Id. at 17. [Return to Text]

52. Id. [Return to Text]

53. Id. at 18. [Return to Text]

54. See South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018). [Return to Text]

55. Id. at 2087. [Return to Text]

56. Id. at 2088. [Return to Text]

57. Id.  The South Dakota Legislature “found that the inability to collect sales tax from remote sellers was ‘seriously eroding the sales tax base’ and ‘causing revenue losses and imminent harm . . . through the loss of critical funding for state and local services.’”  Id. (quoting S. 106, § 8(1), 2016 Leg. Assembly, 91st Sess. (S.D. 2016)). [Return to Text]

58. Id. at 2089. [Return to Text]

59. Id. (“South Dakota conceded that the Act cannot survive under Bellas Hess and Quill but asserted the importance, indeed the necessity, of asking this Court to review those earlier decisions in light of current economic realities.”). [Return to Text]

60. Id. [Return to Text]

61. Id. at 2089–90. [Return to Text]

62. Id. at 2090–91. [Return to Text]

63. Id. at 2091. [Return to Text]

64. Id. at 2091–92. [Return to Text]

65. Id. at 2092. [Return to Text]

66. Id. [Return to Text]

67. Id. [Return to Text]

68. Id. at 2099.  The Court noted that the substantial nexus requirement is “clearly sufficient” based upon these restrictions.  Id. [Return to Text]

69. Kan. Dep’t of Revenue, Notice 19-04: Sales Tax Requirements for Retailers Doing Business in Kansas (Aug. 1, 2019), []. [Return to Text]

70. Id. [Return to Text]

71. Id. [Return to Text]

72. Id. [Return to Text]

73. Id. [Return to Text]

74. See South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018). [Return to Text]

75. Id. at 2093. [Return to Text]

76. Id. at 2092.  “‘It has long been settled’ that the sale of goods or services ‘has a sufficient nexus to the State in which the sale is consummated to be treated as a local transaction taxable by that State.’”  Id. (quoting Okla. Tax Comm’n v. Jefferson Lines, 514 U.S. 175, 184 (1995)). [Return to Text]

77. Id. at 2093. [Return to Text]

78. Id. at 2099 (“Here, the nexus is clearly sufficient based on both the economic and virtual contacts respondents have with the State.  The Act only applies to sellers that deliver more than $100,000 of goods or services into South Dakota or engage in 200 or more separate transactions . . . .”). [Return to Text]

79. See id. [Return to Text]

80. Id. at 2099 (“ . . . South Dakota’s tax system includes several features that appear designed to prevent discrimination against or undue burdens upon interstate commerce.  First, the Act applies a safe harbor to those who transact only limited business in South Dakota.”). [Return to Text]

81. See id.  In fact, the Court notes that future litigation will be needed in order to fully understand the limits of the Commerce Clause and online retail.  Id. at 2099.  The Court recognizes “some other principle in the . . . Commerce Clause doctrine might invalidate [South Dakota’s] Act” and “these issues have not yet been litigated or briefed, and so the Court need not resolve them here.”  Id. [Return to Text]

82. See Kan. Dep’t of Revenue, Notice 19-04: Sales Tax Requirements for Retailers Doing Business in Kansas (Aug. 1, 2019), []; Wayfair, 138 S. Ct. 2080. [Return to Text]

83. See Wayfair, 138 S. Ct. 2080. [Return to Text]

84. See id. [Return to Text]

85. See id. [Return to Text]

86. See Kan. Dep’t of Revenue, Notice 19-04: Sales Tax Requirements for Retailers Doing Business in Kansas (Aug. 1, 2019), []; Wayfair, 138 S. Ct. 2080. [Return to Text]

87. See Wayfair, 138 S. Ct. 2080. [Return to Text]

88. Id. at 2099. [Return to Text]

89. See Kan. Dep’t of Revenue, Notice 19-04: Sales Tax Requirements for Retailers Doing Business in Kansas (Aug. 1, 2019), []. [Return to Text]

90. See id. [Return to Text]

91. See id. [Return to Text]