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Finishing SALT: April State Focus & March Wrap-Up

A Grain of SALT: April State Focus – South Dakota

On April 17, the United States Supreme Court will hear oral argument in South Dakota’s case challenging the Court’s physical presence requirement for sales tax nexus. South Dakota v. Wayfair, Docket 17-494.

50 years ago, in National Bellas Hess v. Department of Revenue, 386 U.S. 753 (1967), the Supreme Court held that the Due Process and Commerce Clauses of the United States Constitution barred states from requiring remote retailers with no physical presence in a State to collect and remit sales tax. In 1992, the Court affirmed its prior ruling under the Commerce Clause. Quill v. North Dakota, 504 U.S. 298 (1992).

Quill has been at the center of state tax nexus controversy since the time of its issuance, as states have worked to restrict, and taxpayers have worked to expand the scope of the ruling. States and taxpayers have been continually tied up in disputes regarding the meaning of “physical presence” sufficient to trigger nexus. Concerned about the rapid growth of digital commerce, states have advanced increasingly aggressive theories of “physical presence” in an attempt to stem the loss of sales tax revenues from internet sales. Taxpayers, on the other hand, repeatedly have sought to apply the physical presence nexus standard to other types of taxes, principally income tax. Until South Dakota v. Wayfair, the Supreme Court declined to accept review of any case seeking further guidance with respect to the physical presence nexus standard.

In 2015, in a concurrence issued in Direct Marketing Association v. Brohl, 135 S.Ct. 1124 (2015), Justice Kennedy strongly signaled that the Court was ready to reconsider the physical presence nexus standard. In his concurrence, Justice Kennedy stated that given changes in technology and consumer sophistication, it would be “unwise” to delay any longer a reconsideration of the Court’s holding in Quill. Justice Kennedy went on to characterize Quill as “[a] case questionable even when decided,” and suggested that the decision “now harms States to a degree far greater than could have been anticipated earlier.” According to Justice Kennedy, Quill “should be left in place only if a powerful showing can be made that its rationale is still correct.”

Not surprisingly, states responded aggressively to Justice Kennedy’s remarks by enacting laws or adopting regulations that directly challenge the physical presence nexus requirement. In South Dakota, the state legislature amended its sales tax nexus statute, on a going-forward basis, to incorporate an economic nexus standard triggered by at least 200 South Dakota sales or $100,000 in South Dakota sales revenue in a calendar year. When Wayfair successfully challenged the constitutionality of the new nexus statute before the South Dakota Supreme Court, the stage was set for United States Supreme Court review.

As of the date of this publication, 38 amicus briefs have been filed in connection with the South Dakota v. Wayfair appeal. In addition to considering the physical presence nexus standard, the Court may address the issue of retroactivity in its ruling, in response to concerns expressed that states other than South Dakota might seek to give retroactive effect to any ruling that rejects the physical presence nexus standard. The international tax community is also watching the appeal with interest, given the United States government’s active involvement. If the United States argues that states have the power to tax sales to state residents by out-of-state retailers, what does this mean for the international front, as non-US countries attempt to tax digital sales income?

© 2020 McDermott Will & EmeryNational Law Review, Volume VIII, Number 95


About this Author

Stephen P. Kranz Lawyer McDermott Will

Stephen P. Kranz is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office.  He engages in all forms of taxpayer advocacy, including audit defense and litigation, legislative monitoring, and the formation and leadership of taxpayer coalitions.  Steve is at the forefront of state and local tax issues, including developments arising in the world of cloud computing and digital goods and services.  He assists clients in understanding planning opportunities and compliance obligations for all states and all tax types. ...

Mary Kay McCalla Martire, McDermott, local tax disputes lawyer, Internal Audits Attorney

Mary Kay McCalla Martire focuses her practice on state and local tax disputes. She helps clients with audits, tax-related litigation, letter rulings and settlement conferences. Mary Kay has experience resolving disputes involving income, sales and use, utility and telecommunications taxes, as well as premium and retaliatory tax.

Mary Kay has an extensive litigation background in state and federal court, as well as administrative tribunals. She has particular experience in the defense of qui tam (whistleblower) claims filed in the state tax arena, and has won the dismissal of many Illinois False Claims Act cases. Mary Kay played a key role in most of the reported decisions issued by the Illinois appellate court in this area over the last decade. She also has experience defending clients against class action and consumer fraud claims.

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Richard C. Call is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm's Boston office.  He focuses his practice on state and local tax litigation before administrative and judicial bodies, at all levels and in multiple states, with respect to income, franchise, gross receipts, and sales and use taxes.  He also advises clients on the state and local tax consequences of business restructurings, as well as the impact of new state legislation on current business operations.

Richard is a frequent publisher on state and local tax topics.  He has published...