South Dakota Supreme Court Strikes Down State’s Remote Seller Law: U.S Supreme Court Challenge Expected
The South Dakota Supreme Court has struck down, as unconstitutional, the state’s 2016 law, Senate Bill 106, which required remote sellers (online retailers) with no physical presence in South Dakota, to collect and remit the state’s sales tax, if either in the previous or current calendar year:
1. The remote seller’s gross revenue from the sale of tangible property, any products transferred electronically, or services delivered into South Dakota exceeded $100,000 or,
2. The remote seller had 200 or more separate transactions involving the sale of tangible personal property, any products transferred electronically, or services delivered into South Dakota
South Dakota is expected to appeal the decision.
In March 2016, South Dakota enacted a remote seller law, Senate Bill 106 (SB 106), that required remote sellers (online retailers) with no physical presence in the state, but met the revenue or transaction thresholds above, to collect and remit South Dakota sales and use tax. Shortly after the enactment of the law, the South Dakota Department of Revenue (Department) began issuing written notices to sellers it believed met the remote seller thresholds of the new law. The notices informed recipients of the requirement to register for South Dakota sales tax by a certain date and warned that failure to register could result in a declaratory judgment action against the seller. Among those that received the notices were online retailers, Wayfair, Inc., Newegg and Overstock. However, Wayfair, Newegg and Overstock did not register for sales tax licenses as required both by the remote seller law and the Department notices. Thereafter, South Dakota, in South Dakota v. Wayfair, Inc., moved in the South Dakota circuit court for a declaratory judgment:
1. That the requirements of the remote seller law (SB 106) were valid and applicable to the retailers; and,
2. Seeking to require the Respondents (the remote sellers in the action) to register for sales tax licenses and collect and remit sales tax.
The Respondents interposed the affirmative defense that the SB106 violated the commerce clause of the U.S. constitution and was, thus, unconstitutional. The South Dakota circuit court agreed with the remote sellers and found the remote seller law unconstitutional.
South Dakota appealed the Circuit Court’s decision to the State’s Supreme Court. At oral argument before the South Dakota Supreme Court, South Dakota made no attempt to defend the constitutionality of the law but specifically stated that its intention in enacting SB 106 was to precipitate reconsideration by the U.S. Supreme Court of its “physical presence” precedent in Quill v North Dakota. On September 13, 2017, the South Dakota Supreme Court upheld the decision of the lower court and held that SB 106 violated the dormant Commerce Clause of the United States Constitution and directly conflicted with the physical presence requirement of Quill “which still remains the controlling precedent on the issue of commerce clause limitations on interstate collection of sales and use taxes.”
Given South Dakota’s objective in enacting the remote seller law, an appeal of the case to the U.S. Supreme Court is expected.
What Does CohnReznick Think?
Since Quill was decided in 1992, the way business is done has dramatically transformed, with the advent of on-line shopping and the expansion of service based businesses. As is often the case, the tax laws have not kept up with the changes in the way the economy is growing and working and many states, including South Dakota, are seeking to impose their sales taxes on “remote” sellers. Accordingly, many states have expressed frustration with the Quill physical presence sales tax nexus limitation and have, by statute, sought to challenge the supremacy of the physical presence orthodoxy and provoke a U.S. Supreme Court reconsideration of Quill. However, many states simply do not understand the true burdens that remote sales tax laws have on remote sellers and, while it may be “easy” to impose a tax, it may be much more complex for certain taxpayers, especially smaller taxpayers, to comply. Given South Dakota’s stated objective, to overturn Quill, the state is expected to appeal the decision of its Supreme Court to the U.S. Supreme Court. A number of current Justices on the U.S. Supreme Court, including Justice Kennedy, have expressed a willingness to reconsider Quill. Accordingly, we believe, it is a fair assessment to conclude that the push towards a reconsideration of Quill has gained additional momentum. We will continue to watch and report on developments relating to “remote seller” nexus provisions.
For more information, please contact Scott Smith, Director, State and Local Tax Services, at Scott.Smith@CohnReznick.com or 973-364-7720.
© 2017 CohnReznick LLP
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