Update 9.14.2017: The South Dakota Supreme Court has refused to take up the case and recommends the U.S. Supreme Court revisit Quill. Read the opinion here.
Aug. 29 marked another milestone in South Dakota’s journey to tax remote sales. The South Dakota Supreme Court heard arguments for and against the state’s Remote Seller Compliance Law (SB 106), which requires out-of-state retailers doing a certain amount of business in the state to collect and remit South Dakota sales and use tax. As in earlier hearings, the state did not defend its law. However, it’s still at odds with the remote retailers fighting it.
South Dakota questions the constitutionality of its own law
SB 106 establishes a policy of economic nexus: It requires any business that lacks a physical presence in South Dakota but makes at least 200 separate sales transactions or $100,000 in sales each year to collect and remit South Dakota sales and use tax. It also invites “the most expeditious possible review of the constitutionality of this law.”
In fact, the true intention of the Remote Seller Compliance Law is not to glean more tax revenue but rather to challenge the physical presence precedent upheld by the United States Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Quill maintains that a state cannot tax a business that lacks a significant connection to (i.e., physical presence in) the state.
The state’s argument begins and ends with the fact that “the law has not changed” — Quill is still valid. On Tuesday, Attorney General Marty Jackley stated his case in less than 10 minutes, asking the court to:
- Affirm the lower court’s grant of the Retailers’ Motion for Summary Judgment
- Do so expeditiously so South Dakota can quickly file for certiorari at the U.S. Supreme Court
- Provide “a critical and important voice” urging the U.S. Supreme Court to review the case
Retailers refute South Dakota’s tactics
Not surprisingly, the retailers opposing SB 106 also want the Supreme Court to rule against South Dakota. However, they don’t want the case to move on the U.S. Supreme Court to challenge Quill.
In fact, they insist Quill’s physical presence rule should be retained. They maintain that “the South Dakota Supreme Court does not have the facts necessary to support the state’s cert petition.” Among the unknowns:
- The compliance burdens retailers would face if required to comply with the South Dakota law
- The amount of revenue retailers would lose if the physical presence rule is overturned
Furthermore, they argue that it’s the duty of Congress, not the courts or the states, to establish “the proper balance between a free-flowing national marketplace … and the interest of the States in burdening such commerce in order to secure the collection of revenue ultimately due from its residents” (Appellees Brief).
Let Congress decide
The retailers aren’t alone in hoping Congress will take up this issue. Indeed, when the U.S. Supreme Court ruled against remote sales tax collections in Quill Corp. v. North Dakota, it invited Congress to reconsider its decision: “The underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve. … Congress remains free to disagree with our conclusions.”
By and large, states would also prefer a congressional solution. Over the years, numerous bills have been introduced that would grant states with simplified sales tax reporting the right to tax certain remote sales. Yet like their predecessors, the Marketplace Fairness Act of 2017 and the Remote Transactions Parity Act of 2017 have failed to come up for consideration in the House. However, the No Regulation Without Representation Act, which would codify Quill and greatly restrict states’ authority to tax interstate commerce, received a hearing last month.
Since states are losing faith that a federal solution will ever materialize, they’re taking matters into their own hands. In addition to South Dakota, Alabama, Colorado, Indiana, Minnesota, Oklahoma, Rhode Island, Vermont, Washington, Wyoming, and others have all established policies that challenge the physical presence precedent and broaden the definition of what it means to do business in the state. The U.S. Supreme Court allowed Colorado’s use tax notification requirement to stand but has not yet agreed to hear a case pertaining to remote sales tax collection.
All eyes will be looking to see if the Supreme Court takes on the South Dakota case. The bench includes at least one justice who seems inclined to overturn Quill: Justice Robert Kennedy. In 2015, he wrote in a concurring opinion, “It is unwise to delay any longer a reconsideration of the Court’s holding in Quill.” Justice Neil Gorsuch may share that view. Yet the fact that no other justice joined Kennedy’s concurrence leaves the fate of Quill uncertain.
The South Dakota Supreme Court will publish its opinion on South Dakota v. Wayfair Inc., Overstock.com Inc., and Newegg Inc., under case number 28160.
Learn more about nexus and state attempts to tax remote sales here.