Online Sales Tax Marching Toward South Dakota High Court

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Jennifer McLoughlin

The South Dakota Supreme Court could soon take up the state’s online sales tax that a lower court ruled unconstitutional.

In a March 6 decision, the South Dakota Sixth Judicial Circuit granted summary judgment to the retailers named as defendants—Wayfair Inc., Inc. and Newegg Inc.—that sought a ruling that the state’s economic nexus regime ( S.B. 106, codified as S.D. Codified Laws Chapter 10-64) is contrary to federal constitutional limitations. 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 ).

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 forbids states from imposing sales and use tax collection obligations on sellers without a physical presence in-state.

The South Dakota statute provides that an appeal from the circuit court’s decision must be filed with the South Dakota Supreme Court.

“We respect the court’s decision as it relates to our case and anticipate that South Dakota’s Supreme Court will be taking this up,” Andy Gerlach, secretary of South Dakota’s Department of Revenue, said in a March 7 statement provided by DOR Communications Director Jonathan Harms. “We will continue our efforts as the case develops.”

‘On the Right Track.’

The statute, “by requiring remittance of sales tax by sellers who ‘do [] not have a physical presence in the state,’ fails as a matter of law to satisfy the physical presence requirement that remains applicable to state sales and use taxes under Quill and its application of the Commerce Clause (U.S. Const. Art. I, s.8, cl. 3),” according to the opinion.

Matthew P. Schaefer, a partner with Brann & Isaacson and counsel for the retailers, told Bloomberg BNA by email that the court’s ruling renders the economic nexus provisions “unlawful and unenforceable.” He further noted that the decision enjoins the state from enforcing the statute against the defendant retailers and “any retailer that has not affirmatively consented or otherwise agreed to report the sales tax on a voluntary basis (as provided in SDCL 10-64-4).”

“The ruling thus prevents the State from implementing a statute that seeks improperly to expand state taxing jurisdiction in clear violation of controlling Supreme Court precedent,” he said.

Steve DelBianco, NetChoice executive director, told Bloomberg BNA that the South Dakota decision “puts us on the right track.”

“The state has already conceded summary judgment at the state circuit court level, and they’re not going to change their mind at the state supreme court level,” he said, noting that the state is on record agreeing that the law is invalid under Quill . NetChoice and the American Catalog Mailers Association brought a separate lawsuit in April 2016, seeking a declaratory judgment that S.B. 106 is facially unconstitutional.

“The circuit court ruling puts us on the right track because the state supreme court will likely go the same way,” he added. “And if the U.S. Supreme Court declines to hear the case, then Quill stays in place.”

Recognizing Changing Times

Some point to the opinion’s language as broadcasting to the U.S. Supreme Court that the time has come to re-visit Quill.

“This Court is duty bound to follow applicable precedent of the United States Supreme Court,” the opinion said. “This is true even when changing times and events clearly suggest a different outcome; it is simply not the role of a state circuit court to disregard a ruling from the United States Supreme Court.”

South Dakota is among several states hosting challenges over similar economic nexus regimes, including Alabama and Tennessee, where through administrative rule or statute, the states require that retailers satisfying a specified threshold of sales must collect and remit sales tax.

Similar economic nexus bills have surfaced in at least 15 statehouses during the 2017 legislative session, riding the growing wave of interest in capturing lost revenue from untaxed remote sales—and ultimately generating a challenge that ultimately nullifies Quill. This trend was in part encouraged by a call from Justice Anthony Kennedy for a case to reconsider the 25-year-old case. Wyoming’s governor signed a bill into law March 1, which could soon prompt another lawsuit.

‘Multiple Paths for Overturning Quill.’

Joe W. Garrett Jr., deputy commissioner of revenue with the Alabama Department of Revenue, told Bloomberg BNA by email that his state’s DOR is pulling for South Dakota and is pleased that the “process is moving with relative speed and according to their plan.” If the litigation continues to follow the same pace, the case may advance to the U.S. Supreme Court on a petition for review this fall, giving the high court the opportunity to consider the case in 2018.

At that time, nominee Neil Gorsuch may have joined the court and returned it to its full nine members. His past writing, some court watchers have said, indicates that he would be in favor of revisiting Quill.

Garrett further noted that Alabama’s own challenge is distinct, in that the case arose out of the traditional assessment appeal process and entails the development of a factual record.

“The fact that different states are going about this in different ways is a good thing in our opinion,” he said. “It creates multiple paths for overturning Quill. We are confident that one way or another the states will be successful.”

Stop ‘Absolute Craziness.’

However, some are hoping the South Dakota decision is a deterrent to other states considering similar economic nexus statutes or regulations.

“It’s good to be on the side of the law,” Hamilton Davison, president and executive director of the American Catalog Mailers Association, told Bloomberg BNA. Noting that the circuit court’s ruling demonstrates that the system works, he said that “it gives us the opportunity to now push back on other states and say, ‘hey guys, this is craziness. Absolute craziness.’”

“We’ve got a vehicle that will potentially go to the Supreme Court, and if the Supreme Court decides not to hear it, the existing status quo stands,” he added. “My hope is that it will keep other states from becoming bad actors on this.”

DelBianco further noted that if the Supreme Court denies review in the South Dakota case, that leaves Quill in place and indicates the court doesn’t see a need to re-hear the case.

“There might be another circuit court, another state supreme court who goes differently,” he said. “And until that happens, you don’t create the controversy that would necessarily drive the Supreme Court to take it up.”

Other South Dakota Case

In the meantime, Schaefer explained that the circuit court’s ruling doesn’t render moot the pending ACMA/NetChoice lawsuit. However, he expects the state will devote its attention to appealing the March 6 decision.

“This ruling would serve as additional grounds for the Plaintiff trade associations to seek judgment as a matter of law in the ACMA/NetChoice action,” he said.

“At the same time, the State raised a number of procedural defenses in its Answer in that case,” he added. “Given that the injunction against enforcement applies with respect to all retailers that have not affirmatively consented or otherwise agreed to report South Dakota sales tax, potentially affected members of ACMA and NetChoice benefit from the Court’s March 6 ruling regardless of further action in the ACMA/NetChoice suit.”

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

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

For More Information

Text of the opinion is at

Copyright © 2017 Tax Management Inc. All Rights Reserved.

Request Daily Tax Report: State