Court Filings Duel Over South Dakota's New Online Sales Tax

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By Jennifer McLoughlin

April 29 — Two competing lawsuits over the constitutionality of South Dakota's recently enacted “Quill kill bill” for remote retailers have made their way to the courthouse.

Scheduled to take effect May 1, S.B. 106 requires out-of-state sellers with annual in-state sales exceeding $100,000 or 200 separate transactions to collect and remit sales tax, despite their lack of a physical presence in the state.

The American Catalog Mailers Association (ACMA) and NetChoice filed April 29 in the South Dakota Sixth Judicial Circuit a complaint challenging the facial constitutionality of S.B. 106, seeking declaratory judgment that the law violates the commerce clause under Quill Corp. v. North Dakota and the due process clause.

The day prior, a complaint was filed in the same court on behalf of the South Dakota Department of Revenue, requesting a declaratory judgment that validates the law. The DOR acknowledged that such a ruling “will require abrogation of the United States Supreme Court's decision in Quill Corp. v. North Dakota, 504 U.S. 208 (1992), and ultimately seeks a decision from the United States Supreme Court to that effect in this case.”

South Dakota has joined a growing state-driven campaign to replace the 24-year-old Supreme Court decision that stands as the physical presence benchmark for sales tax purposes.

Impact of Litigation

In an April 29 e-mail, the DOR referred to an online statement advising that its filing triggered “the automatic injunction of Section 3 of Senate Bill 106.” That section provides for an injunction “during the pendency of the action, applicable to each state entity, prohibiting any state entity from enforcing the obligation in section 1 of this Act against any taxpayer who does not affirmatively consent or otherwise remit the sales tax on a voluntary basis.”

The DOR's statement mirrors one request for injunctive relief in the complaint. And ACMA and NetChoice also represented that their complaint acted as an injunction, suspending enforcement of the law.

In the meantime, NetChoice Executive Director Steve DelBianco believes the litigation may place other states in a holding pattern as the cases play out in South Dakota.

“Filing in South Dakota was intended to get in front of what other states may do and to deter other states from taking up similar measures,” he told Bloomberg BNA April 29. “They would have to get in line as this moves its way through the courts. And it's a sensible approach for a state that wants to avoid a protracted legal battle that someone else has already begun.”

Protecting ‘Quill.'

In an April 29 statement, ACMA and NetChoice denounced S.B. 106 as a gross abuse of states' taxing authority in direct contravention of Quill.

“This is equivalent to malpractice,” Hamilton Davison, ACMA president and executive director, said in the statement. “It represents exactly the type of bad governance that makes Americans cynical of big government. While US Supreme Court precedent gives Congress the right to make new rules for interstate commerce in this area, State legislatures do not have this right.”

ACMA and NetChoice, who represent catalog mailers and e-commerce businesses, highlighted in the complaint that legislative findings recognized the law's conflict with Quill. And the findings further acknowledged that “it may be reasonable notwithstanding this law for remote sellers to continue to refuse to collect the sales tax in light of existing federal constitutional doctrine.”

Incorporating language that expedites judicial review in a case addressing the statute's constitutionality, S.B. 106 seemed designed as a vehicle to set up a Supreme Court appeal.

“This law acknowledged that it requires a change in federal constitutional doctrine,” DelBianco said. “And it facilitates a fast track for any challenge through the state supreme court and onto the U.S. Supreme Court.”

Swift Attack

South Dakota's fast-track legislation was first introduced Jan. 27, signed March 22 by Gov. Dennis Daugaard (R), and scheduled to take effect May 1.

The bill took root during the National Conference of State Legislatures' January 2016 meeting.

“We said if Congress doesn't act, states are going to,” Max Behlke, manager of state-federal relations for NCSL, told Bloomberg BNA April 29.

Following Alabama's lead in 2015, when it adopted an economic presence standard for remote retailers under Department of Revenue Rule 810-6-2-.90.03, many states have made it their mission to rework Quill. In 2016 alone, 35 bills expanding the nexus footprint for out-of-state sellers have been introduced, with approximately 18 active bills remaining (63 DTR H-1, 4/1/16).

Alabama is approximately two to three weeks away from final assessments for some of the largest remote retailers that represent a majority of online sales into the state, according to Joe W. Garrett Jr., deputy co-commissioner for the Alabama Department of Revenue. Following final assessments, taxpayers may seek a judicial appeal.

Alabama is “shortly behind” South Dakota, with “more than 30 days away from an appeal,” Garrett told Bloomberg BNA April 29.

Economic Distortion

Motivators behind state efforts to redefine nexus have included erosion of the sales tax base and an “online loophole” favoring remote retailers – both identified in the DOR’s complaint.

States are answering what many believe was a call from Justice Anthony M. Kennedy, who urged the “legal system” for a case that triggers a re-examination of the highest court’s earlier precedent. Concurring in a March 2015 decision in Direct Mktg. Ass’n v. Brohl (DMA), Kennedy found “it is unwise to delay any longer a reconsideration” of Quill given technological advancements.

In an April 28 statement, the Retail Industry Leaders Association voiced support for the DOR’s lawsuit as a much-needed measure in the absence of a congressional solution.

“Allowing online-only retailers to evade sales tax collection creates an artificial price advantage and a significant market distortion,” according to the statement. “This inequity has led to the shuttering of thousands of brick and mortar stores across the country.”

Federal Resolution?

With more states in the mix, practitioners see a stronger impetus for a federal solution, either judicial or legislative.

“I believe the more states involved, and the more that have this litigation percolating, the more likely it is the Supreme Court could choose to take a case,” Garrett said, although noting it may not have the same influence as a split among the federal circuits.

However, he added that it “raises the consciousness about the issue,” which can accentuate the importance of the highest court's intervention on the issue sooner than later.

As for congressional action, DelBianco anticipates that “stakeholders, businesses for the most part, will complain about the states trying to go it alone, creating tax obligations in an unworkable patchwork. And that might increase congressional attention to a federal legislative solution.”

Garrett echoed the possibility of congressional movement, potentially out of concern of an unfavorable judicial determination.

ACMA and NetChoice are represented by Bangs, McCullen, Butler, Foye & Simmons LLP and Brann & Isaacson. The South Dakota Department of Revenue is represented by the South Dakota Deputy Attorney General Richard Williams.

To contact the reporter on this story: Jennifer McLoughlin in Washington at

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

For More Information

The ACMA and NetChoice's complaint is at

The ACMA and NetChoice's statement is at

The South Dakota Department of Revenue's complaint is at

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