Federal Court to Dissect South Dakota Online Tax Dispute

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By Jennifer McLoughlin

Nov. 30 — South Dakota’s digital sales tax will be front and center during oral argument scheduled for early December.

The U.S. District Court for the District of South Dakota set a Dec. 8 hearing on two competing motions in a dispute over the state’s economic nexus regime ( S.B. 106). The statute, signed into law in March, requires remote retailers with annual in-state sales exceeding $100,000 or 200 separate transactions to collect and remit sales tax ( South Dakota v. Wayfair, Inc., D.S.D., No. 3:16-CV-03019, oral argument scheduled 12/8/16 ).

The case originated in late April in the South Dakota Sixth Judicial Circuit, with the state seeking a declaratory judgment validating the law. The retailers named as defendants—Wayfair Inc., Overstock.com Inc. and Newegg Inc.—removed the matter to the federal district court.

During the summer, the parties briefed two opposing submissions—the retailers’ summary judgment motion, asking the court to strike the statutory tax as contrary to federal constitutional limitations; and the state’s remand motion, arguing that jurisdiction remains with the lower state court.

The court will have to resolve the jurisdiction question first before ruling on summary judgment, Matthew P. Schaefer, a partner with Brann & Isaacson, told Bloomberg BNA in a Nov. 30 e-mail. Brann & Isaacson is named counsel for the retailers.

Agreement Over ‘Quill’?

South Dakota’s economic nexus regime was crafted to ignite litigation that lawmakers hoped would lead to the U.S. Supreme Court. The state has argued that it is critical that the high court reconsider its increasingly maligned 1992 decision in Quill Corp. v. North Dakota, 504 U.S. 298, which prohibits states from requiring retailers to collect sales and use taxes absent an in-state physical presence.

The state’s position is that both federal and state law support returning the case to the original court. However, in the alternative, the state has supported a ruling favoring the retailers’ argument that federal law proscribes the online sales tax, setting up a potential appeal to the Supreme Court.

Schaefer noted that the state’s insistence that only the state court can resolve its attempt to toss a federal doctrine “is both remarkable and without support in the law.”

“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 to a single State that disagrees with the federal limits on its authority,” he said.

Schaefer added that “because the State of South Dakota agreed in its opposition that the South Dakota ‘economic nexus’ law is unconstitutional, the federal District Court—after it resolves the jurisdictional issue presented by the State’s motion to remand—should enter judgment in favor of the Defendants and dismiss the State’s complaint, with prejudice.”

The state Department of Revenue wasn’t immediately available for comment.

Awaiting Higher Authority

Schaefer said the federal district court isn’t required to resolve the pending motions by a set time after the Dec. 8 oral argument.

Should the court retain jurisdiction and rule on the merits, an appeal would be available before the U.S. Court of Appeals for the Eighth Circuit. The losing party could then seek review with the U.S. Supreme Court.

The high court is primed to consider dueling petitions over Colorado’s notice and reporting regime during its Dec. 9 conference ( Direct Mktg. Ass’n v. Brohl, U.S., No. 16-267, distributed for conference 12/9/16 ; Brohl v. Direct Mktg. Ass’n, U.S., No. 16-458, distributed for conference 12/9/16 ). The petition brought on behalf of the state’s Department of Revenue asks for review of Quill.

Some have wondered whether the South Dakota district court has been awaiting the U.S. Supreme Court’s decision on the DMA petitions—which, if accepted, may raise into question Quill’s future and could color the South Dakota case.

Lower Proceeding

Meanwhile, another battle over South Dakota’s digital sales tax is quietly sitting in state court. Filed a day apart from the DOR’s April complaint, the American Catalog Mailers Association and NetChoice are challenging the facial constitutionality of S.B. 106, seeking declaratory judgment that the law violates due process and the commerce clause under Quill.

There have been no developments since the DOR’s answer in June.

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

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

For More Information

Text of S.B. 106 is at http://src.bna.com/kqc.

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