Online Sales Tax Law Unconstitutional: South Dakota Court

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By Jennifer McLoughlin

South Dakota’s online sales tax legislation is one step closer to its intended destination: the U.S. Supreme Court.

The South Dakota Sixth Judicial Circuit ruled March 6 that the state’s economic nexus regime ( S.B. 106) is unconstitutional. The statute, signed into law in March 2016, 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., S.D. Cir. Ct., No. 32 Civ. 16-000092, 3/6/17 ).

Attorneys for the retailers named as defendants—Wayfair Inc., Overstock.com Inc. and Newegg Inc.—didn’t immediately respond to requests for comment.

“For decades, the playing field has been stacked against Main Street and in favor of online merchants,” according to a National Governors Association news release. “But today’s decision moves us one step closer to resolving this longstanding issue with broad bipartisan support.”

State lawmakers presented the law as a direct challenge to the U.S. Supreme Court rule from Quill Corp. v. North Dakota, 504 U.S. 298 (1992), which prohibits states from imposing sales and use tax collection obligations on sellers without an in-state physical presence. The NGA said that Quill hasn’t kept up with “today’s modern economic and technological realities.”

The opinion is under direct attack in Alabama court as well, and is expected to prompt lawsuits in many other states amid a surge of state activity to broaden tax authority over online sales.

The South Dakota case originated in late April 2016, with the state seeking a declaratory judgment validating the law. The removed the matter to the U.S. District Court for the District of South Dakota, prompting the state’s request for remand. The federal district court returned the case to state court in January.

Agreement on ‘Quill.’

Matthew P. Schaefer, a partner with Brann & Isaacson and counsel for the retailers, told Bloomberg BNA after a Dec. 8 hearing that the federal court recognized there is no dispute regarding the retailers’ right to summary judgment—given that both sides agree the law is invalid under Quill. He further noted that the DOR told the federal judge it would take the same position on the retailers’ right to summary judgment should the case return to state court.

In a Jan. 17 e-mail, Schaefer noted the importance of the federal proceedings for the state court’s determination.

“While the federal court did not reach the Defendants’ motion for summary judgment, because it ruled it lacked jurisdiction, the Court’s opinion reiterates that the State has acknowledged in its briefing (as well as on the record in open court) that the Defendants are entitled to summary judgment on the grounds that S.B. 106 is unconstitutional under current Commerce Clause standards as set forth in Quill Corp v. North Dakota,” he said. “Whether the matter had remained in federal court, or as it now moves forward in state court, there is no dispute that the lower courts must enter judgment invalidating the law.”

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 the opinion is at http://src.bna.com/mKY

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