South Dakota Supreme Court Strikes Digital Sales Tax Statute

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By Ryan Prete

The South Dakota Supreme Court Sept. 13 affirmed a decision restricting the state’s ability to tax remote retailers and opened the door for potential U.S. Supreme Court reconsideration of a 25-year-old opinion ( South Dakota v. Wayfair, Inc. , S.D., No. 28160, 9/13/17 ).

The state Supreme Court agreed with the lower Sixth Judicial Circuit Court, which 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—the1992 U.S. Supreme Court decision that prohibits states from imposing sales and use tax collection obligations on vendors without a physical presence in-state. The South Dakota statute would require out-of-state sellers with annual in-state sales exceeding $100,000 or 200 separate transactions to collect and remit sales tax.

“However persuasive the State’s arguments on the merits of revisiting the issue, Quill has not been overruled. Quill remains the controlling precedent on the issue of Commerce Clause limitations on interstate collection of sales and use taxes,” the opinion said. “We are mindful of the Supreme Court’s directive to follow its precedent when it ‘has direct application in a case’ and to leave to that Court ‘the prerogative of overruling its own decisions.”’

The South Dakota litigation is furthest along among several state lawsuits intended to undo Quill, including cases pending in Alabama, Indiana, Tennessee and Wyoming. South Dakota officials have indicated they will appeal to the U.S. Supreme Court, which sets a deadline for a petition for review within 90 days after entry of the judgment.

Parties React

South Dakota Attorney General Marty Jackley (R), who argued on behalf of the state, had requested the South Dakota high court encourage the U.S. Supreme Court to take up the issue. Jackley saw the decision as a victory.

“The retail landscape significantly changed with the inception of the internet and access to online shopping. Federal law currently shields out-of-state businesses from paying the same tax remitted by South Dakota businesses,” Jackley said in a press release. The decision “paves the way to respectfully request the U.S. Supreme Court to provide that much needed fairness to save main streets and jobs across South Dakota.”

The South Dakota Department of Revenue was pleased with the swift decision. The DOR has reported that almost $1.6 million has been collected from remote sellers since the state enacted its economic nexus law last year.

“We will now take the matter to the U.S. Supreme Court where we look to make important progress in maintaining tax fairness throughout South Dakota and the rest of the nation,” according to a Department of Revenue statement emailed to Bloomberg BNA.

Online retail giants Wayfair Inc., Newegg Inc., and Inc.—defendants in the South Dakota case—were satisfied with the ruling.

“The Court’s ruling demonstrates that states such as South Dakota have no authority to flaunt long-standing Supreme Court precedent,” Matthew Schaefer, a partner with Brann & Isaacson and counsel for the remote retailers, told Bloomberg BNA in an email. “The defendants are pleased that the South Dakota Supreme Court affirmed the Circuit Court’s ruling that the South Dakota economic nexus law is unconstitutional.”

“The defendants argued in their briefs and at oral argument that this appeal does not present a proper vehicle for review of Quill and that the South Dakota Supreme Court should not endorse the State’s request that it urge review by the U.S. Supreme Court,” Schaefer said. “I think the state Supreme Court recognized that this is not an appropriate case for revisiting the Quill standard.”

Retail Industry Approves

“This is an important day,” Deborah White, senior executive vice president and general counsel for the Retail Leaders Industry Association and president of the Retail Litigation Center, told Bloomberg BNA. “The next step is for the U.S. Supreme Court to quickly take this matter up and level the playing field for the entire retail industry.”

White believes the U.S. Supreme Court has a strong interest in the case, citing Justice Anthony Kennedy’s 2015 concurrence calling for the legal system to “find an appropriate case for this Court to reexamine” Quill. Optimism of the U.S. Supreme Court accepting a Quill appeal has been buoyed with Justice Neil Gorsuch joining the bench this year—a judge who has indicated in a past opinion that Quill may be dated.

“We hope the Justices recognize this case as a crucial vehicle to change the status quo,” White said.

Tom McGee, president and CEO of the International Council of Shopping Centers, told Bloomberg BNA that the topic of remote sales tax collection has been the retail industry’s largest legislative focus in decades.

“This is a positive development in what has been a huge issue for retailers, and we appreciate the ruling from the South Dakota Supreme Court,” McGee said. “It’s unfortunate that Congress hasn’t been able to act on the issue, but now the U.S. Supreme Court has an opportunity to revisit this precedent which was set far before the modern retail environment existed.”

Legislative Struggles

The Marketplace Fairness Coalition, which for years has pushed Congress to pass legislation allowing states to collect sales tax from online transactions, said in a press release that while the South Dakota Supreme Court decision acts as another step to overturn the Quill precedent, Congress should be the body to end the remote sales tax “loophole.”

“A patchwork of state and local laws has emerged, and businesses and communities need a federal solution that implements a simpler standard,” the Marketplace Fairness Coalition said in a statement. “That means passing e-fairness legislation that will provide parity at the point of sale like the Marketplace Fairness Act in the Senate and the Remote Transactions Parity Act in the House.”

The Remote Transactions Parity Act of 2017 (H.R. 2193) (RTPA) and the Marketplace Fairness Act of 2017 (S. 976) (MFA)—which would both widen the reach of states’ taxing authority over remote retailers—are pending and haven’t received a vote in Congress. The No Regulation Without Representation Act of 2017 (H.R. 2887) (NRRA) (which would codify Quill) is also pending in Congress. A House Judiciary subcommittee heard testimony on the NRRA during a July 25 hearing, but there has been no floor vote.

‘Wait and See’

Not all tax practitioners view the ruling as a stamped ticket to the nation’s highest court.

“No one was surprised by the outcome of the Wayfair case. Quill is still Supreme Court precedent and the South Dakota law, and other such legislation across the country, violates it,” Jared Walczak, senior policy analyst at the Tax Foundation, told Bloomberg BNA. “However, the state court, while acknowledging some of the state’s arguments, stopped well short of language suggesting that the U.S. Supreme Court should take the case.”

“The opinion suggests that it is time to reconsider Quill, but acknowledges that it is up to the U.S. Supreme Court to make that decision,” Joe W. Garrett Jr., deputy commissioner of revenue with the Alabama Department of Revenue, told Bloomberg BNA in an email. “I think that was about as good as South Dakota was going to get.”

Four U.S. Supreme Court justices must approve a case before it can be taken up. “We must wait and see,” Garrett said.

Jamie Yesnowitz, state and local tax practice and National Tax Office leader for Grant Thornton LLP, told Bloomberg BNA that the magnitude of the case could make it more attractive to Supreme Court Justices.

“I read the case as an implicit invitation for the U.S. Supreme Court to take up this issue, but only if the Court sees fit to do so,” Yesnowitz said. “Whether the Court does so is certainly open to question—the odds that they do are somewhat more elevated than a typical case that gets appealed given the unique procedural posture of the case, the national significance of the issue, the number of states that have enacted similar legislation and regulations, and an interest in the topic by at least two of the current justices.”

Smaller Sellers

Steve DelBianco, executive director of NetChoice, a Washington, D.C.-based internet commerce trade association, told Bloomberg BNA that if the U.S. Supreme Court takes up the case, NetChoice would be quick to back up smaller remote retailers, who DelBianco argues would be harmed the most if Quill was overturned.

“If the high court takes this case, we will be ready to show that the perspective of the three large online retail defendants is only a small part of the story, since many thousands of smaller businesses would bear disproportionate burdens and costs if they are forced to become tax collectors for 12,000 jurisdictions across 46 states,” DelBianco said.

To contact the reporter on this story: Ryan Prete in Washington at

To contact the editor responsible for this story: Jennifer McLoughlin at

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