Online Sales Tax Law Heads to South Dakota Supreme Court

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By Jennifer McLoughlin

The U.S. Supreme Court may soon have the occasion to rethink its 25-year-old limitation on states’ sales tax jurisdiction over remote retailers.

The South Dakota Department of Revenue filed a notice of appeal from a March 6 circuit court determination that S.B. 106 (codified as S.D. Codified Laws Chapter 10-64) is unconstitutional. The statute provides that an appeal goes directly to the state supreme court and mandates review “as expeditiously as possible” ( South Dakota v. Wayfair, Inc. , S.D. Cir. Ct., No. 32 Civ. 16-000092, notice of appeal filed 3/8/17 ).

The Sixth Judicial Circuit Court 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 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 lawmakers crafted the law as a vehicle to undo the U.S. Supreme Court’s rule under Quill Corp. v. North Dakota, 504 U.S. 298 (1992) prohibiting states from imposing sales and use tax collection obligations on sellers without a physical presence in-state.

Matthew P. Schaefer, a partner with Brann & Isaacson and counsel for the retailers, told Bloomberg BNA in an April 5 email that “briefing is likely to extend into at least early June 2017. Whether and when the South Dakota Supreme Court may schedule oral argument, and then issue a decision in the case, is of course uncertain, and likely would depend upon the nature of the filings and arguments.”

Under the South Dakota rules of appellate procedure, an appellant’s brief is due 45 days after service of the notice of appeal, Schaefer said. A response brief is then due 45 days after service of the appellant’s brief, and the reply brief deadline is 15 days later.

A party interested in petitioning the U.S. Supreme Court for review would have 90 days from the state supreme court’s ruling.

States Stirring

Many practitioners anticipate the South Dakota litigation will advance to the U.S. Supreme Court on a petition for review this fall. However, whether the high court accepts such an appeal is another question—absent a conflict among lower courts as to whether Quill remains good law, the chances may be slim.

States have mimicked one another in a campaign to capture lost revenue from untaxed remote sales and, in some states, to generate a direct challenge to nullify Quill. This trend was in part encouraged by a call from Justice Anthony Kennedy for a case to reconsider the 25-year-old decision.

The South Dakota lawsuit is one of at least three underway intended to stir U.S. Supreme Court review—Alabama and Tennessee are also hosting litigation over similar economic nexus regimes that require sales tax collection from out-of-state sellers satisfying a specified monetary threshold or volume of in-state sales.

The “kill Quill” movement has gained momentum in 2017, with states adopting more ambitious measures targeting the digital marketplace. Nearly 20 states, through administrative rule or statute, have pushed for economic nexus standards this year.

Bills in Arkansas, Georgia, Mississippi, New Mexico and Utah have died this legislative session. Wyoming’s governor signed a bill into law March 1, which could soon prompt another lawsuit.

South Dakota Position

While South Dakota is appealing the circuit court’s ruling, it could very well ask the state supreme court for an order rubber-stamping the March 6 determination.

The state has acknowledged that S.B. 106 is invalid under Quill—in earlier briefing before the U.S. District Court for the District of South Dakota, where the parties disputed in part the retailer’s removal to federal court, the state supported a ruling favoring the retailers’ argument that federal law proscribes the digital sales tax.

The state said it was critical that the U.S. Supreme Court scrutinize its divisive Quill decision.

“Properly understood, this case shows how far out of step Quill is with contemporaneous Commerce Clause doctrine,” according to a South Dakota brief filed in August 2016. “This Court can, however, help to clearly frame the question of Quill vitality for the United States Supreme Court—the only Court with the power to change it—by acknowledging the antiquated physical-presence test of Quill should no longer shelter modern retailers who otherwise have a ‘substantial nexus’ with the taxing state.”

Schaefer told Bloomberg BNA after a December hearing that the DOR told the federal judge it would take the same position on the retailers’ right to summary judgment in state court.

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 notice of appeal is at

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