This case directly involves South Dakota S.B. 106, which imposes
a sales tax collection obligation on an out-of-state seller if
it:
The case began when South Dakota brought an action seeking a
judicial declaration that the requirements of S.B. 106 were valid
and applicable to four out-of-state retailers: Overstock.com,
Newegg, Systemax, and Wayfair (collectively, the
"Retailers"). The Retailers filed a motion for summary
judgment, arguing that there was no issue of material fact because
the sales tax collection obligation of S.B. 106 directly
contradicts the physical presence nexus rule of National Bellas
Hess and Quill.5 The Sixth Judicial
Circuit of South Dakota and the Supreme Court of South Dakota
agreed and granted the Retailers' motion.
The question immediately before the Court is whether the motion
for summary judgment was properly granted and affirmed by South
Dakota state courts. What is unclear, however, is whether the Court
will take this case as an opportunity to revisit
Quill's physical presence rule, as recommended by
Justice Kennedy in his concurring opinion in Direct Marketing
Association v. Brohl.6
What's next?
Regardless of the Court's eventual decision in South
Dakota v. Wayfair, the decision will directly impact similar
"kill-Quill" laws (for example, Indiana,
Wyoming) and regulations (for example, Alabama). What is unclear,
though, is what impact the Court's decision will have on other
state efforts to distinguish Quill, rather than directly
overruling it.
Colorado's reporting regime was upheld as constitutional by
the U.S. Court of Appeals for the Tenth Circuit in Direct
Marketing Association v. Brohl.7 After the Court
denied cert in that case, several states enacted similar reporting
regimes. If the Court ultimately affirms Quill's
physical presence rule in South Dakota v. Wayfair, will
more states follow Colorado's lead and enact similar reporting
regimes?
Other states have attempted to limit Quill by taking a
broad view of physical presence—and the Court's eventual
decision in South Dakota v. Wayfair may not impact those
efforts. For example, Massachusetts has promulgated a so-called
"cookie nexus" regulation that is premised on the
assertion that certain vendors have sufficient physical in-state
presence through the use of software and complimentary text data
files, known as "cookies," located on computers of their
in-state customers, thus satisfying the requirement of
Quill.8
Similarly, the Court's eventual decision may not immediately
impact state attempts to impose sales tax collection or reporting
obligations on "platforms."
Minnesota,
Pennsylvania, Rhode Island, and
Washington have recently enacted regimes requiring companies
that facilitate sales by providing an online marketplace to collect
sales tax on sales certain remote sellers, or comply with
burdensome reporting regimes.9 These regimes raise
issues under the Due Process Clause of the United States
Constitution and the Internet Tax Freedom Act.
Taxpayers and state revenue departments may be hoping that the
Court's decision in South Dakota v. Wayfair will
provide much needed clarity regarding the constitutional limits on
state taxing authority. But no such clarity is guaranteed. If the
Court reaffirms Quill's physical presence rule,
questions may remain on the scope and reach of the physical
presence rule. And if the Court announces a new bright-line rule,
there is no certainty that the rule will prove any easier to
administer than Quill's physical presence rule. Taxpayers
should closely monitor this litigation and new state efforts to
enforce their sales and use tax laws in the future.
Footnotes
1.504 U.S. 298 (1992).
2.386 U.S. 753 (1967).
3.504 U.S. 298 (1992).
4.S.B. 106, § 1, 2016 Leg., 91st Sess. (S.D.
2016).
5.South Dakota agreed there were no disputes of material
fact. South Dakota v. Wayfair, Inc., et al., No. 32CIV16-000092
(S.D. Cir. Mar. 6, 2017).
6.135 S. Ct. 1124, 1135 (Kennedy, J. concurring)
(2015).
7.814 F.3d 1129 (10th Cir. 2015), cert. denied, 137 S.Ct.
591 (2016).
8.A challenge to Massachusetts' regulation was filed
in Virginia state court, and the Court's decision to grant cert
may not halt
that litigation. Through legislation, Ohio has adopted a
similar "cookie nexus" standard for purposes of its sales
tax.
9.See, e.g. Jonathan Maddison, Walter Hellerstein &
John Swain, Platforms, 86 STATE TAX NOTES 1165 (Dec. 18,
2017).
This article is presented for informational purposes only
and is not intended to constitute legal advice.
