Copy South Dakota’s Online Sales Tax, Avoid Lawsuits: Lawyers

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By Ryan Prete

State tax lawyers aren’t expecting widespread litigation after the U.S. Supreme Court’s monumental online sales tax ruling.

Eric Citron, the author of South Dakota’s briefs in South Dakota v. Wayfair, told Bloomberg Tax that he doesn’t expect lawsuits to flood the states. That is because he expects states to copy or closely follow South Dakota’s economic nexus model, which requires vendors to collect and remit sales and use taxes if they meet certain sales thresholds.

“States want laws they can enforce, and they aren’t interested in auditing really small sellers,” said Citron, a partner at the law firm Goldstein & Russell P.C. “There might be lawsuits if states placed high burdens on small vendors, but I don’t think this is possible; expect states to closely mimic South Dakota’s law.”

And states are expected to move quickly to copy South Dakota, either to enforce existing laws or to enact new ones. Most have told Bloomberg Tax in the days after Wayfair that they are moving with all deliberate speed to implement their laws and start to force tax collections.

The U.S. Supreme Court issued a 5-4 ruling June 21 in Wayfair that threw out its divisive 1992 rule in Quill Corp. v. North Dakota. Quill, which states like the petitioning South Dakota for years have tried to “kill” through lawsuits and regulation, prohibited states from imposing sales tax collection obligations on vendors lacking an in-state physical presence.

The majority in Wayfair suggested strongly that South Dakota’s law would pass constitutional muster; the state’s model imposes the tax collection threshold at 200 separate transactions or $100,000 in in-state sales. But the court stopped short of formally declaring that South Dakota’s law, which dozens of states have mimicked already, was valid in the absence of Quill. The court just made clear that Quill was no longer part of any commerce clause test for when states may impose taxes.

Accordingly, the South Dakota Supreme Court still has to bless the state’s economic nexus model before it can become effective. Still, many project that states will flock to copy South Dakota’s model.

Heed Kennedy’s Words

Richard D. Pomp, the Alva P. Loiselle Professor of Law at the University of Connecticut School of Law, told Bloomberg Tax that lawsuits could spring up in states that:

  •  (1) install a threshold far lower than South Dakota’s,
  •  (2) push for retroactive back taxes, and
  •  (3) aren’t members of the Streamlined Sales and Use Tax Agreement (SSUTA).
Pomp said a state with the above characteristics would be a “dream plaintiff” for trade groups or vendors to sue.

However, states “know you’ll be safe if you just follow South Dakota,” Pomp said.

Not coincidentally, Justice Anthony Kennedy emphasized these three elements in the June 21 opinion.

Kennedy underscored that South Dakota’s law offers protections to especially smaller merchants because the state is a member of the SSUTA.

As part of the SSUTA, sellers collect tax voluntarily and remit it to the 24 state participants, which cover the filing costs and other fees. Kennedy plugged the program as a system that “standardizes taxes to reduce administrative and compliance costs.”

Kennedy emphasized that South Dakota’s law isn’t retroactive, and that the potential for another state to apply their laws retroactively wasn’t a strong enough reason to maintain Quill.

“These issues are not before the Court in the instant case; but their potential to arise in some later case cannot justify retaining this artificial, anachronistic rule that deprives States of vast revenues from major businesses,” Kennedy wrote.

New Streamlined Members?

Twenty-one states that administer a sales tax aren’t members of the SSUTA.

According to Bloomberg Tax data, 20 states have an economic nexus model in place: Alabama, Connecticut, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Minnesota, Mississippi, North Dakota, Oklahoma, Pennsylvania, Rhode Island, South Dakota, Tennessee, Vermont, Washington, and Wyoming.

Of these states, Alabama, Connecticut, Illinois, Louisiana, Maine, Mississippi, and Pennsylvania aren’t full member states of the SSUTA.

Several of those economic nexus states, Indiana, Tennessee, and Wyoming, have litigation pending. Alabama settled similar litigation just before the Wayfair decision. Most of the still-pending matters were in a holding pattern while the U.S. Supreme Court considered Wayfair, and it’s still unclear how they may proceed.

Litigation also is pending in states that have other types of online sales tax regimes: Ohio and Virginia (over a Massachusetts regulation).

For years, internet sellers have complied with a variety of state tax collection regimes, which have proliferated recently as the digital economy has displaced traditional brick-and-mortar retailers. But practitioners tell Bloomberg Tax that most states will either switch to or pursue economic nexus models only in the wake of Wayfair.

eBay Petitions Trump

Meanwhile, there is still some push for federal intervention despite the majority in Wayfair declining to wait for Congress to act on any of several long-pending bills involving intrastate taxation of online sales.

E-retailer giant eBay Inc. broke the its silence on the Wayfair ruling when it created a petition just days after the high court ruling to “to protect entrepreneurs, artisans and small businesses from potentially devastating Internet sales tax legislation.”

The petition is addressed to President Donald Trump,—who lauded the June 21 ruling—Congress, and state governors, and urges the lawmakers to:

  •  keep the Internet as free from government taxation and regulation as possible;
  •  protect entrepreneurs, small businesses and artisans from new taxes, audits or collection burdens because they can least afford the added costs;
  •  continue to prohibit states and localities from applying and enforcing sales and use tax laws on small, remote local businesses that have no political or voting connection to the taxing state; and
  •  reject tax policies that raise prices on consumers who shop online with small businesses for artisan, craft, religious, vintage, or other niche products because they shouldn’t be paying more taxes. Inc. and Wayfair Inc. declined to comment on the petition. Etsy Inc. didn’t immediately respond to a request for comment.

More States Weigh in

In the interim, most e-retailers are in a holding pattern as states start to cement their post- Wayfair plans. South Dakota intends to release guidance in the coming days on how it will enforce its law and when, pending the remanded state Supreme Court case, Wade LaRoche, public affairs manager with the state Department of Revenue, told Bloomberg Tax June 25.

Meanwhile, states with economic nexus laws on the books seem to be moving ahead as expediently as possible.

In Wisconsin, Gov. Scott Walker (R) said June 25 that he wants to apply the economic nexus standard affirmed by the Supreme Court to e-commerce retailers selling goods into his state. But Walker said any new collections should be offset with tax reductions elsewhere in the state revenue code.

During an appearance at the University of Wisconsin, Walker said the state should implement the same tax collection strategy embraced by South Dakota, “but it shouldn’t be a tax increase.” To that end, Walker said he favors a strategy that would be revenue neutral to the state.

According to a report by the U.S. Government Accountability Accounting Office, Wisconsin stands to collect as much as $187 million annually from online retailers. The state currently applies a sales tax of 5 percent. Some counties apply an additional local sales tax.

Walker Administration spokeswoman Amy Hasenberg said the governor is already developing some options with the Wisconsin Department of Revenue.

“We are working with the Department of Revenue in reviewing the Court’s decision to determine our options moving forward, but as the governor stated, he wants to make sure we are lowering the overall tax burden on the hardworking taxpayers,” Hasenberg told Bloomberg Tax in an email.

The state Legislature in 2013 adopted budget language saying that any new taxes from e-commerce transactions should be offset by equivalent cuts to the state income tax.

Vermont plans to begin enforcing its law—which was enacted in 2016 and went into effect when Quill was reversed—starting July 1, according to Will Baker, assistant attorney general at the Vermont Department of Taxes. Vermont’s threshold is 200 transactions or $100,000 in revenue, which mirrors South Dakota’s law.

Baker told Bloomberg Tax that he isn’t expecting litigation after the Wayfair ruling.

Kentucky plans to move ahead and enforce its economic nexus law—passed in April—on July 1, according to the state’s Department of Revenue.

Connecticut also said it plans to enforce collections starting July 1, but Max Behlke, director of budget and tax for the National Conference of State Legislatures, told Bloomberg Tax he isn’t sure they’ll be able to begin enforcing their laws by then.

“I’m not saying that they can’t, especially as I have not had direct conversations with their tax departments, but implementing their laws for most all remote sellers will take a little time,” Behlke said June 22. “They have to publish notices, register new businesses, and answer questions. So, on a pragmatic basis, I think it’s going to take more than a week to get this done. But, I could be wrong.”

Reactions, Reactions Everywhere

Other states reacting to Wayfair include:

Nevada: Bill Anderson, executive director of the Nevada Department of Taxation, said “this increase in taxable sales has the potential to increase the State’s 2% sales tax collections by nearly $30 million annually above what they would otherwise be.”

Connecticut: Jim Carson, spokesman for the Connecticut Department of Revenue Services, told Bloomberg Tax that the state is losing between $100 million and $200 million in sales tax receipts not collected by online merchants. The estimate is about a year old, he said.

Louisiana: The Department of Revenue released a statement noting that “while Louisiana is in a good position having adopted a provision very similar to the South Dakota law, we are still some time away from a final decision and seeing the full impact. It should be noted that Louisiana is currently collecting sales tax from some of the nation’s largest online retailers, including Amazon, and smaller companies as well. It is far too soon for a definitive estimate of what the state will receive from online sales as a result of today’s decision, but when appropriate, we will provide updates.”

Vermont: Tax Commissioner Kaj Samsom said the ruling should net the state between $3 million and $10 million in the new fiscal year. “It’s preliminary. We’re still reading the decision and we have been looking at the numbers for the last six months but it looks like, preliminarily, we’ll be in a position where vendors need to start collecting and remitting sales tax starting in July,” Samsom said.

Illinois: Revenue Director Connie Beard said the state’s new economic nexus provisions, enacted in June, would help Illinois collect its 6.25 percent use tax from additional sellers not remitting funds to the state. She estimated Illinois would collect $200 million annually when the law (Public Act 100-0587) becomes effective Oct. 1. It isn’t retroactive.

Iowa: Officials for the Department of Revenue stressed that its law mirroring South Dakota’s will take effect Jan. 1, and wouldn’t be applied retroactively. The state’s Legislative Services Agency reported that the law ( Senate File 2417) would generate $27.6 million from online retailers during the first six months of 2019, and $66 million in fiscal year 2020.

Minnesota: the Department of Revenue released a statement applauding the outcome in Wayfair, issuing brief guidance designed to assist sellers until it provides further information within 30 days. “We will work with our customers to ensure fair, efficient, and transparent implementation of this decision,” the department said.

In 2017, Minnesota enacted the first law requiring e-commerce marketplaces such as Amazon, eBay, and Etsy to collect sales and use taxes on behalf of third parties selling goods and services on their platforms. This marketplace provider law created two possible effective dates: July 1, 2019, or sooner if the U.S. Supreme Court issues an opinion regarding Quill.

With assistance from Michael J. Bologna in Chicago, Brenna Goth in Phoenix, Aaron Nicodemus in Boston, and Paul Stinson in Austin, Texas

To contact the reporter on this story: Ryan Prete in Washington at

To contact the editor responsible for this story: Ryan C. Tuck at

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