A state circuit court has found South Dakota’s economic nexus law to be unconstitutional. You’d think that would be bad news, but rather than see this as a setback, the state is taking it as a step forward. It brings the case a little closer to the Supreme Court of the United States; this, it turns out, has always been the goal of South Dakota’s remote seller compliance law.

Most people would shy away from the prospect of a lengthy legal battle, so it’s surprising that South Dakota is pleased the court found its remote seller compliance law to be unconstitutional. Wouldn’t it have been better to have the court find it constitutional instead?

Designing a law so it will be challenged

Maybe not. “The South Dakota law was designed to be challenged” (National Governors Association). Shortly before the law took effect on May 1, 2016, the state filed a declaratory judgment action with the state circuit court, asking it to declare the law constitutional. This automatically triggered an injunction, so the law was prevented from being enforced even before it took effect. This, too, was part of the state’s plan.

A legal battle quickly took shape. The day after the state filed its declaratory judgment action, the American Catalog Mailers Association and NetChoice did the same, asking the court to find the law unconstitutional. Then Wayfair Inc., Overstock.com, Inc., and Newegg Inc. made it known they would not comply with the law because it was unconstitutional, and the state sued.

In its initial complaint, the state asks the court to grant it the right to “require Defendants to collect and remit state sales tax on sales of tangible personal property and services for delivery into South Dakota.” It also acknowledges that “a declaration in its favor will require abrogation of the United States Supreme Court’s decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992).” Ultimately, it explains, the state is seeking “a decision from the United States Supreme Court to that effect in this case.” In other words, its endgame is to have the Supreme Court overturn Quill.

Quill affirmed a 1967 Supreme Court decision (National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753) that a state can only require a business to collect and remit sales and use tax if that business has a substantial physical presence in the state. This bright-line rule, South Dakota argues, “effectively immunize[s] out-of-state retailers lacking a physical presence within a state from having to remit any state sales or use taxes.” It further notes that “the effects of that immunity on the State treasury and its general retail markets have vastly multiplied because of the meteoric rise of Internet commerce.” Quill, it’s worth noting, was decided before the birth of ecommerce.

Sue us: Governors want resolution

South Dakota isn’t alone. The bipartisan National Governors Association (NGA) wants a level playing field for both Main Street and internet retailers; online sellers not required to collect and remit tax, it claims, have an unfair competitive advantage over the in-state sellers that must charge tax. Likewise, the National Conference of State Legislatures (NCSL) says it has “watched our main street businesses and state tax collections suffer” because of the remote sales tax collection problem.

Both organizations favor a federal solution. However, both are “tired of waiting” for Congress to act Therefore, as the NCSL explained in a Jan. 2016 letter to legislative leaders, “We cannot depend on Congress to heed the calls of their state legislative partners. It is time for the states to take action in their own legislative chambers to solve the remote sales tax collection problem.” To that end, NCSL drafted model legislation for states to use to overturn Quill.

South Dakota answered the call with SB 106. Thus, it is celebrating the fact that its law has been found to be unconstitutional.

There’s a long road between yesterday’s ruling by the South Dakota circuit court and possible deliberation before the United States Supreme Court, and The Council of State Governments believes South Dakota “will likely lose at every turn” along the way. Even if it makes it to the door, there is no guarantee the Supreme Court will agree to hear a challenge to Quill; four Supreme Court justices would have to agree to hear the case.

If the case makes it to the Supreme Court and the court won’t take it on, all hope for those seeking the right to tax remote sales is not lost. Similar policies in other states are also being challenged. In fact, an internet retailer has already taken Alabama to court over its Requirements for Certain Out-of-State Sellers Making Significant Sales into Alabama (Rule Number 810-6-2-.90.03), which the seller, and others, argue is unconstitutional. State officials couldn’t be happier. Alabama Deputy Revenue Commissioner Joe Garrett, Jr. has been unequivocal and unapologetic about the fact that the rule is “inconsistent with Quill.” He, too, wishes to “lose the case very quickly and cleanly in state court to get our cert petition to the Supreme Court.” Expressing a similar sentiment, Department of Revenue Tax Commissioner Julie Maggie once tweeted, “All sorts of things were constitutional or unconstitutional until they weren’t anymore. Sue us.” Wacky stuff.

Additional information about the South Dakota law, including case documentation, is available from the South Dakota Department of Revenue. See 2016 Senate Bill 106, Remote Seller Compliance.

Stay up-to-date on sales tax news with the Avalara Sales Tax Newsletter.

photo credit: purplemattfish via photopin cc