Zap State Digital Sales Tax: Retailers to Federal Court

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By Jennifer McLoughlin

Aug. 29 — South Dakota's admission that its online sales tax statute violates federal law should compel a court ruling that the regime is unconstitutional, Wayfair Inc. and other digital retailers argued ( South Dakota v. Wayfair, Inc. , D.S.D., No. 3:16-CV-03019, reply briefs filed 8/26/16 ).

Briefing concluded Aug. 26 in the competing motions over S.B. 106, the state statute requiring remote retailers with annual in-state sales exceeding $100,000 or 200 separate transactions to collect and remit sales tax.

South Dakota has requested that the U.S. District Court for the District of South Dakota return the case to state court. The retailers—Wayfair, Inc. and Newegg Inc.— have asked for summary judgment striking the tax regime as unconstitutional.

Central to the retailers' reply brief was the state's Aug. 12 response, which the retailers argued mandates judgment in their favor. Absent remand to the lower court, South Dakota urged for the ruling requested by the retailers: that federal judicial law disallows the state's online sales tax (158 DTR H-1, 8/16/16).

Built for Supreme Court Review

The state reasoned that such a ruling was critical in spawning a U.S. Supreme Court review of its divisive 1992 opinion in Quill Corp. v. North Dakota, 504 U.S. 298. The decision prohibits states from requiring sales and use tax collection from companies lacking an in-state physical presence.

“Because the State of South Dakota agrees that its new ‘economic nexus' law is unconstitutional, the federal District Court, after it resolves the jurisdictional issue presented by the State's motion to remand, should enter judgment in favor of the Defendants and dismiss the State's complaint, with prejudice,” Matthew Schaefer, a partner with Brann & Isaacson LLP, which is representing the retailers, told Bloomberg BNA in an Aug. 26 e-mail.

The state's reply brief reiterated that it “built this action in order to facilitate review by the Supreme Court of the United States.” However, it maintained that at this stage, jurisdiction rests with the state court.

Potential Outcomes

Potential paths for the federal court to take on the parties' motions include:

  •  remand to state court and take no position on the constitutionality of the state's digital sales tax statute;
  •  deny remand and grant summary judgment for retailers, finding the statute unconstitutional under Quill—and affirming that it should remain good law;
  •  deny remand and grant judgment for retailers, finding the statute unconstitutional under Quill—but not indicating whether Quill should remain good law;
  •  deny remand and grant summary judgment for retailers, finding the statute unconstitutional under Quill—but indicating that Quill should no longer remain good law; and
  •  deny remand and deny judgment for retailers, finding the statute constitutionally valid—and ruling that Quill shouldn't remain good law.

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

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

For More Information

The remote retailers' reply brief is at

The state's reply brief is at

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