E-Retailers, South Dakota Agree: Strike Digital Sales Tax

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By Jennifer McLoughlin

Aug. 15 — South Dakota concedes that its new digital sales tax statute violates federal law—but considers it crucial in updating a federal standard that it says doesn't reflect the modern marketplace.

South Dakota and three remote retailers, including Wayfair Inc., filed Aug. 12 responsive briefs in dual actions addressing S.B. 106, the state's recently enacted economic nexus regime. The law mandates remote retailers with annual in-state sales exceeding $100,000 or 200 separate transactions to collect and remit sales tax.

In an opening round of motions, South Dakota requested remand to state court, while the retailers sought summary judgment declaring the statute unconstitutional (142 DTR H-2, 7/25/16).

In its Aug. 12 response, South Dakota reiterated that the U.S. District Court for the District of South Dakota should remand the case to state court. Alternatively, the state supported a ruling favoring the retailers' argument that federal law proscribes the state's online sales tax, setting up a potential appeal to the U.S. Supreme Court.

The state said it was critical that the high court scrutinize its divisive 1992 decision in Quill Corp. v. North Dakota, 504 U.S. 298 , which prohibits states from requiring sales and use tax collection from companies lacking an in-state physical presence.

“Properly understood, this case shows how far out of step Quill is with contemporaneous Commerce Clause doctrine,” according to South Dakota's brief. “This Court can, however, help to clearly frame the question of Quill vitality for the United States Supreme Court—the only Court with the power to change it—by acknowledging the antiquated physical-presence test of Quill should no longer shelter modern retailers who otherwise have a ‘substantial nexus' with the taxing state.”

Meanwhile, the retailers—Wayfair, Overstock.com Inc. and Newegg Inc.—argued against a return to state court, maintaining that the case raises a question of federal constitutional law properly within the district court's jurisdiction.

Overhauling Outdated Law

South Dakota and Alabama have led the charge against Quill, enacting economic nexus standards that disregard the physical presence rule. Those efforts heeded the call from Justice Anthony Kennedy, who suggested in a March 2015 concurring opinion that Quill may be outdated and ripe for the U.S. Supreme Court's reconsideration (128 DTR J-1, 7/5/16).

Advocating for a decision to grant the retailers' request for summary judgment, South Dakota didn't dispute that the district court is bound by Quill. Rather, the state acknowledged that its agenda underlying both the digital sales tax and the lawsuit was “to ask the United States Supreme Court to reconsider Quill in light of two-plus decades of critical experience, the harm Quill has caused to the States, [and] Quill's own acknowledgement that it was likely wrong on the day it was decided.”

However, South Dakota disputed the retailers' reasoning that Quill remains good law, arguing in part that the 24-year-old decision doesn't follow contemporary commerce clause authority.

Federal Forum Is Proper

Contesting the state's request for remand, the retailers noted that South Dakota has recognized that the litigation presents a single question of federal law: whether the state's remote sales tax falters under Quill.

Given the state's objective to topple federal constitutional law, and the absence of any doctrine foreclosing federal jurisdiction, the retailers argued that the case must remain before the district court.

“The State's insistence that its attempt to abrogate a federal constitutional standard can only be adjudicated in a state court, and not in federal court, is both remarkable and without support in law,” Matthew Schaefer, a partner with Brann & Isaacson LLP, which is representing the retailers, told Bloomberg BNA in an Aug. 12 e-mail.

“The State’s argument that the federal courts have no jurisdiction over its actions serves to emphasize the unprecedented nature of the State’s intrusion into an area of national (i.e., federal) concern—the regulation of interstate commerce—that the Constitution assigns to Congress, not to the States, let alone a single State that disagrees with the limits on its authority.”

A briefing schedule issued by U.S. District Judge Roberto A. Lange set Aug. 26 as the deadline for a final round of reply briefs.

To contact the reporter on this story: Jennifer McLoughlin in Washington at jmcloughlin@bna.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com

For More Information

The remote retailers' responsive brief to the remand motion is at http://src.bna.com/hI4.

The state's responsive brief to the summary judgment motion is at http://src.bna.com/hI3.

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