Tax Notes logo

Click here to see operators for terms and connectors searching.

South Dakota High Court Finds Remote Sales Tax Law Unconstitutional

POSTED ON Sep. 19, 2017

South Dakota will ask the U.S. Supreme Court to overturn the physical presence test for collecting and remitting sales tax after a September 14 decision by the state supreme court found the state’s remote sales tax law unconstitutional.

The South Dakota Supreme Court’s unanimous decision in State of South Dakota v. Wayfair Inc., Inc., and Newegg Inc. upheld a lower court ruling that S.B. 106, the South Dakota law, violates Quill Corp. v. North Dakota, and is therefore unconstitutional. The law requires certain remote sellers to collect and remit sales tax even if they have no physical presence in South Dakota.

The state sued the three large online retailers for not complying with S.B. 106. South Dakota officials have been frank from the start that they hope the law would serve as a Quill challenge. Therefore, the state was pleased that the South Dakota Supreme Court decision — coming only three weeks after the court heard oral arguments August 29 — provides the opportunity for the state to petition the nation’s highest court for a writ of certiorari in the case. The state plans to have a request filed by mid-October.

"The South Dakota Department of Revenue appreciates the South Dakota Supreme Court’s swift decision," DOR spokesman Wade LaRoche said. “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 nation.”

The defendants' attorney, George Isaacson of Brann & Isaacson, said his team views the state supreme court's conclusion that there's no difference between the collection obligations invalidated in Quill and those imposed by S.B. 106 “as confirmation that conducting commerce via the Internet deserves the same constitutional protections as for those transactions undertaken by the more traditional instruments of interstate commerce.”

Retailers who maintain bricks-and-mortar stores, especially small- and mid-size retailers without a significant online presence, have always strongly supported laws such as S.B. 106. Deborah White of the Retail Litigation Center said the state supreme court's decision represents a victory because it is a step toward getting online retailers to collect and remit taxes.

White also cited the 2015 concurrence of Justice Anthony M. Kennedy in DMA v. Brohl, in which he said it is time to revisit Quill. “The combination of Justice Kennedy’s opinion in [DMA] and the South Dakota Supreme Court’s quick but complete dispatch of the case significantly enhance the chances that the U.S. Supreme Court will agree to consider the case during the next term,” according to White, who is the president and general counsel for the Retail Litigation Center.

But others, such as Joseph Henchman of the Tax Foundation, said the U.S. Supreme Court is not the place to resolve the issue of which retailers should be legally required to collect and remit sales tax. That is the province of Congress, he said.

“This issue is much bigger than South Dakota. There are more than 10,000 sales tax jurisdictions nationwide that use different rules for determining what’s taxable and what isn’t,” Henchman said. “We should not lose sight of this or the need for Congress to be the arbiter of a solution to the online sales tax issue that works for everyone.”

Jonathan Maddison of Reed Smith LLP urged caution on Kennedy's 2015 remarks, and also noted the role of Congress.

“We should be careful not to overstate Justice Kennedy’s concurring opinion in DMA as a strong indicator of the Court granting cert. Not a single justice joined Kennedy’s concurring opinion, which should, at a minimum, temper expectations,” Maddison said. “Even if some justices believe Quill’s physical presence rule is not ideal, they may choose to deny cert because Congress is better suited to address the issue."

"In Quill, the Court acknowledged that Congress 'may be better qualified' to determine the appropriate nexus standard,” Maddison added.

Steve DelBianco of NetChoice, which strongly opposes S.B. 106 and similar laws in other states, said he thinks the perspective of small businesses has been lost in the current fight.

“This ruling gives the state what it wanted all along — a case they could appeal to the U.S. Supreme Court,” DelBianco said. “If the high court takes this case, we will be ready to show that the perspective of a few large online retail defendants is only a small part of the story. In fact, 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.”

NetChoice has sued South Dakota to stop the law, but that suit is on hold as the current matter makes its way through the courts.

In oral arguments, South Dakota Attorney General Marty Jackley (R) called on the state justices to “weigh in” on the need for the U.S. Supreme Court to overturn Quill when rendering their own judgment on the case, but the justices did not do so. The opinion did, however, cite Kennedy’s concurrence, and noted that the nature of both sales and technology has vastly changed since Quill was decided in 1992.

The state justices concluded their decision by saying Quill is still standing. “However persuasive the state’s arguments on the merits of revisiting the issue, Quill has not been overruled,” the South Dakota opinion said. “Quill remains the controlling precedent . . . we are mindful of the Supreme Court’s directive to follow its precedent.”