Tax Reform Friday: Half-Off Litigation Fees—Online Retailers Reach Settlement with South Dakota


In resolving all remaining issues in South Dakota v. Wayfair, Inc., South Dakota has officially entered into a settlement agreement with Wayfair Inc. and co- litigants, Overstock.com Inc., and Newegg Inc. The settlement, executed on Oct. 31, now officially lifts the injunction from South Dakota's enacted legislation, 2016 S.D. S.B. 106. Under the terms of the agreement, Wayfair, Overstock, and Newegg will have to comply with South Dakota's remote seller law beginning Jan. 1, 2019.

In September 2018, Gov. Dennis Daugaard (R) convened a special session of the South Dakota Legislature to sign into law a measure which removed the imposition of an injunction against the collection of sales tax on remote sales, except with respect to the Wayfair litigants. Thus, all other remote sellers were required to begin collecting and remitting sales tax on Nov. 1, 2018. Now, under 2016 S.D. S.B. 106, which went into effect on Nov. 1, South Dakota will begin enforcing sales tax collection from remote sellers who have $100,000 in sales or 200 transactions per year within South Dakota.

In their joint announcement on Oct. 31, Daugaard and Attorney General Marty Jackley (R) remarked on the end of the Wayfair remote seller litigation. "I look forward to the state's full enforcement of its remote seller law," stated Daugaard. Jackley further added, "Today's settlement agreement is the final step in bringing sales tax fairness to our Main Street businesses across South Dakota by creating a level playing field with out-of-state retailers."

In Wayfair, the U.S. Supreme Court remanded the case to the South Dakota Circuit Court following its determination that Quill v. North Dakota was no longer valid law. To recap Wayfair, the Supreme Court revisited the framework of the substantial nexus prong from the Commerce Clause test from Complete Auto Transit, Inc. v. Brady, overruling the physical presence requirement as “unsound and incorrect.” The court remanded the case to the South Dakota State Circuit Court for trial on the remaining three prongs of the Commerce Clause analysis, which requires that a tax is 1) fairly apportioned, 2) does not discriminate against interstate commerce, and 3) is fairly related to the services the state provides.

The court stated that the taxpayer could, on remand, challenge whether 2016 S.D. S.B. 106 results in unfair apportionment, discriminates against interstate commerce, or imposes an undue burden on interstate commerce. However, the court then proceeded to discuss aspects of South Dakota’s law—no retroactivity, small business safe harbor, and compliance with the Streamlined Sales and Use Tax Agreement—that were intended to prevent a possible violation.

This settlement agreement represents the end of the remote seller taxation odyssey. Without the settlement agreement, the South Dakota Circuit Court would have examined whether the taxation of the litigants satisfied the Commerce Clause, via the test laid out in Complete Auto. That answer will be left unknown. Future taxpayers may assert that the other prongs of the Complete Auto test have not been met, but we will have to wait and see. For now, there are no stumbling blocks left for states to en masse tax remote sellers under their economic nexus statutes.

Continue the discussion on Bloomberg Tax’s State Tax Group on LinkedIn: Do you think this is the end of the remote seller taxation odyssey? Why or why not?

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