High Court Should Review South Dakota Digital Tax Case: Brief

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By Ryan Prete

The U.S. Supreme Court has received the first of an anticipated wave of briefs urging the justices to take up South Dakota’s petition seeking reconsideration of a 25-year-old opinion restricting states’ ability to tax remote retailers.

The National Association of Wholesaler-Distributors’ friend of the court brief, filed Oct. 23, supports South Dakota Attorney General Marty Jackley’s (R) request for review of a Sept. 13 state Supreme Court ruling that found the state’s “economic nexus” law, S.B. 106 (codified as S.D. Codified Laws Chapter 10-64), unconstitutional under Quill Corp. v. North Dakota—the 1992 U.S. Supreme Court ruling that prohibits states from imposing sales and use tax collection obligations on vendors without a physical presence in-state. South Dakota is the first of several expected cases to ask the U.S. Supreme Court to revisit Quill ( South Dakota v. Wayfair, Inc. , U.S., No. 17-494, friend of the court brief filed 10/23/17 ).

Because of the Quill ruling, brick-and-mortar wholesaler-distributors are at a steep disadvantage, the National Association of Wholesaler-Distributors (NAW) said in its brief. According to the group, NAW is comprised of wholesale distributor enterprises of all sizes, representing a $5.6 trillion industry that employs an estimated five million people.

“This disadvantage results in lost sales revenue and hampers the ability of locally present wholesaler distributors to grow their businesses, invest in the community, and produce in-state employment opportunities,” the brief stated.

The brief cited Justice Anthony Kennedy’s concurrence in Direct Marketing Association v. Brohl, calling for a case that provides the opportunity to re-evaluate Quill. NAW argued that “there is no logical basis why, under the U.S. Constitution, state sales tax collection needs a unique ‘nexus’ standard that is different from the general nexus standard” announced in Complete Auto Transit Inc. v. Brady—which established a four-prong test for evaluating the constitutionality of a tax scheme under the federal commerce clause.

The online retailers—Wayfair Inc., Newegg Inc., and Overstock.com Inc.— have a Dec. 7 deadline to respond to South Dakota’s petition for review.

In the meantime, similar “kill- Quill” cases are pending in four other states—Alabama, Indiana, Tennessee and Wyoming. Crutchfield Corp. also filed suit Oct. 24 in Virginia Court challenging Massachusetts regulation 830 CMR 64H.1.7. The regulation, which took effect Oct. 1, orders online vendors to collect Massachusetts sales tax if they have property interests in or use in-state apps and “cookies.” Internet vendors must collect sales tax if they make 100 or more individual transactions and exceed $500,000 worth of in-state sales in a year. However, the Massachusetts DOR has said its regulation isn’t a “kill- Quill” measure .


A dispute over Alabama’s online retailer tax regulation remains pending in the state’s tax tribunal with a 2018 trial possible. The latest schedule for the case, brought by Newegg, calls for briefing no later than Dec. 20, after which the judge may set a hearing date ( Newegg Inc. v. State of Ala., Dep’t of Revenue , Ala. Tax Trib., No. 16-613-JP, revised scheduling order 7/25/17 ).

Alabama was one of the first states to announce sales tax collection duties for out-of-state sellers based solely on economic nexus, in this case annual sales into the state of $250,000. The revenue department regulation took effect in January 2016, a few months after the state’s governor publicly invited a lawsuit over the issue.

Nevertheless, Alabama’s case looks unlikely to make it to the U.S. Supreme Court anytime soon. After a tax tribunal ruling, the case could move through as many as three more levels of state courts before it’s due for Supreme Court review.


The American Catalog Mailers Association and NetChoice suit against Indiana’s anti- Quill legislation continues as Wayfair and Overstock.com dove further into the case after the state dragged them into the case Am. Catalog Mailers Ass’n. v. Krupp, Ind. Super. Ct., No. 49D01-1706-PL-025964, answer and third-party complaint filed 8/28/17 .

On Oct. 26, attorneys for Wayfair and Overstock.com filed an answer to a third-party complaint from the Indiana Department of Revenue. The department sued them in August because the retailers had refused to pay Indiana’s second-highest-in-the-nation 7 percent sales tax under a new tax directed at internet retailers.

The ACMA and NetChoice brought the case in an attempt to invalidate House Enrolled Act 1129, which requires out-of-state retailers to collect and remit Indiana sales tax if those sellers have 200 or more transactions in the state or sell $100,000 or more in-state.

The retailers and associations didn’t immediately respond for comment about the case, but Mark Delcorps, a spokesperson for Overstock.com previously told Bloomberg Tax in an Aug. 30 email that his company would continue to rely on Quill “as the defining ruling on this topic until Congress enacts a new law.”


In Tennessee, a chancery court ordered the state to suspend enforcement of a rule requiring out-of-state retailers to begin collecting and remitting sales tax this year until it decides a lawsuit challenging the rule ( Am. Catalog Mailers Ass’n v. Tenn. Dep’t of Revenue, Tenn. Ch. Ct., No. 17-307-IV, order granting injunction 4/10/17 ).

In May, a state law was enacted that bars the revenue department from collecting taxes from certain online retailers until such a levy is authorized by a court and subsequently approved by the Legislature. The nexus rule was issued in October 2016 and would have required remote sellers with at least $500,000 in annual sales to register by March 1, and begin collecting and remitting sales and use taxes by July 1. However, a court order and the new law stopped its implementation.


Wyoming isn’t enforcing its law requiring out-of-state vendors to remit taxes on remote sales while litigation is pending.

Wyoming’s suit challenging Quill seeks relief that is barred by the federal commerce clause and due process clause, the defendants in the case, Newegg, Overstock.com, and Wayfair, argued in their joint answer Sept. 22 to the state’s amended complaint. The companies are also asking that the suit be dismissed for improper venue ( Wyoming v. Newegg, Inc. , Wyo. Dist. Ct., No. 34238, joint answer of defendants filed 9/22/17 ).

The dispute is over H.B. 19, which requires remote sellers to collect and remit sales and use taxes if they have more than $100,000 in aggregate sales transactions to buyers in Wyoming. The requirement is also triggered for remote sellers with more than 200 transactions involving Wyoming consumers.

Wyoming is requesting a declaratory judgment against remote vendors with no physical presence in the state, seeking compel them to collect and remit sales and use taxes on sales to Wyoming residents. The complaint also named Systemax Inc., which has since been dropped from the case, and Fanatics Inc., which filed a separate answer.

With assistance from Andrew Ballard, Tripp Baltz, Alex Ebert, and Chris Marr

To contact the reporter on this story: Ryan Prete in Washington at rprete@bna.com

To contact the editor responsible for this story: Jennifer McLoughlin at jmcloughlin@bna.com

For More Information

Text of the friend of the court brief is at: http://src.bna.com/tI8.

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