Online Sales Tax Law Faces Uncertain Future in South Dakota

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By Chris Marr

Dec. 9 — A dispute over South Dakota sales tax obligations imposed on out-of-state retailers awaits a federal judge’s ruling on whether it should be remanded to state court, after the parties made their cases at a hearing ( South Dakota v. Wayfair, Inc., D.S.D., No. 3:16-CV-03019, hearing 12/8/16 ).

The Dec. 8 hearing was the latest step in the state’s effort—which mirrors efforts by Alabama and other states—to advance a case to the U.S. Supreme Court to get the Quill physical presence standard overturned. The standard, established by the Supreme Court’s 1992 ruling in Quill Corp. v. North Dakota, 504 U.S. 298, prevents states from imposing sales tax collection duties on e-commerce and other retailers that lack an in-state physical presence.

Attorneys focused their oral arguments on the state’s motion to remand the case, as the other pending motion for summary judgment is essentially already decided, said Matthew Schaefer, attorney with Brann & Isaacson who is helping represent the retailers contesting South Dakota’s new sales tax law.

The court told the attorneys it “understood there to be no dispute regarding the defendants’ right to summary judgment invalidating the South Dakota ‘economic nexus’ statute under the Supreme Court’s decision in Quill Corp. v. North Dakota,” Schaefer told Bloomberg BNA Dec. 8. Both sides agree that the law is invalid under Quill.

If the South Dakota case returns to state court, the Department of Revenue told the federal judge it would take the same position on the retailers’ right to summary judgment, Schaefer said.

“Thus, the parties and the Court were in agreement that, regardless of in which system, federal or state, when the case moves forward, the South Dakota law will be ruled unconstitutional, pending further appeal,” he said.

Ruling Expected Within 30 Days

The federal court expects to issue a decision within 30 days on whether to retain the South Dakota litigation or send it back to state court. Schaefer noted that the judge said he was “wrestling with the close jurisdictional question presented by the state’s motion to remand.”

The South Dakota DOR sued online retailers including Wayfair Inc., Newegg Inc. and Overstock.com Inc. in state court in April, seeking a judgment that would force them to comply with the state’s new remote seller sales tax law. The retailers removed the case to federal court. The law, enacted earlier this year as S.B. 106, requires all remote retailers with annual in-state sales exceeding $100,000 or 200 separate transactions to collect and remit sales tax. It was designed to directly challenge the Quill physical presence standard.

The state has agreed in its court filings that the disputed tax law should be struck down under Quill. The state’s goal is to move the case to the Supreme Court and urge it to reconsider Quill. A summary judgment ruling at the federal district court could be appealed to the U.S. Court of Appeals for the Eighth Circuit, and from there, the losing party could appeal to the U.S. Supreme Court.

Similar litigation is pending at the Alabama Tax Tribunal, where Newegg is contesting an Alabama Department of Revenue regulation also designed to directly challenge Quill ( Newegg v. Alabama Dep’t of Revenue, Ala. Tax Trib., No. S. 16-613 ).

State Court Lawsuit Stalled

A second dispute over South Dakota’s S.B. 106 is pending 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: Chris Marr in Atlanta at cMarr@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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