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South Dakota Nexus Law Held Invalid in Violation of Quill

Like many states, South Dakota recently enacted an aggressive sales and use tax nexus statute requiring certain out-of-state retailers with no physical presence in South Dakota to collect and remit tax on sales made to South Dakota residents. In an effort to collect a portion of the tax revenue that the South Dakota legislature considered "lost" to internet sellers located outside the state, this statute seeks to impose a tax collection obligation based on economic rather than physical presence factors.

Challenge to the South Dakota "Economic" Nexus Law

The lead case in the declaratory judgment litigation regarding the validity of the South Dakota law is South Dakota v Wayfair, et al.[1] In its brief to the South Dakota Supreme Court, the State of South Dakota conceded that the new law had no physical presence requirement and, therefore, was contrary to the U.S. Supreme Court decisions in National Bellas Hess v Illinois[2] and Quill v North Dakota.[3] Unsurprisingly, the South Dakota Supreme Court adhered to these binding Supreme Court precedents and found the South Dakota law unconstitutional. 

South Dakota Efforts to Reverse Quill

The objective underlying South Dakota's enactment of such an aggressive economic nexus statute and the subsequent pursuit of a rapid State Supreme Court decision appears to be U.S. Supreme Court review and reversal of Quill. In 1992, Quill established the current physical presence requirement applicable to out-of-state sellers with regard to sales and use tax collection obligations. The South Dakota legislature, like many state tax commentators, appears to believe that the U.S. Supreme Court will accept an appeal of Wayfair and seize the opportunity to reverse Quill. Proponents of this belief often cite Justice Kennedy's concurring opinion in Direct Marketing Ass'n v Brohl,[4] which suggested that the Court should reconsider its decision in Quill and needed only "an appropriate case" in which to do so. 

Quill Reversal is Far from Certain

Despite Justice Kennedy's criticism of Quill, it is unclear whether South Dakota and like-minded commentators are correct. Justice Kennedy's concurrence was not joined by any of the other eight justices, and the plain language from the majority opinion in Quill notes that:

Congress has the power to protect interstate commerce from intolerable or even undesirable burdens. Commonwealth Edison Co. v. Montana, 453 U.S. 609, 637 (1981) (White, J., concurring). In this situation, it may be that "the better part of both wisdom and valor is to respect the judgment of the other branches of the Government."

Indeed, Justice Scalia's Quill concurrence recognized that Congress has the power to regulate interstate commerce and could counteract National Bellas Hess (and implicitly, Quill) if it desires a different result. The corollary to this commerce clause power, known as the dormant commerce clause, is seen as a prohibition against state action restricting interstate commerce. Although the Quill decision is largely attributable to the dormant commerce clause, assuming that the Supreme Court must respond to the changing circumstances of the internet economy by reversing precedent is arguably an oversimplification. The Supreme Court may very well choose – as it has since 1992 - to abstain from further involvement in the matter and defer to the nation's elected officials.

United States Supreme Court Review and State Actions

Whether the Supreme Court will grant certiorari and consider the South Dakota case is a matter of pure discretion. Although the economy certainly has changed significantly since 1992, the Court's decision in the current conflict will necessarily be colored by its decisions in National Bellas Hess and Quill, and the principle of Stare Decisis, which generally requires respect for prior decisions of the Court. Thus, taxpayers must remain prepared for the possibility that the Supreme Court may not review Wayfair, and that there may be no federal legislative enactment; and in such a case, taxpayers will remain subject to varying and uncertain tax collection obligations across the states in which they do business.

Taxpayers with multi-state sales and use tax issues may contact the authors of this alert with any questions.

[1]State of South Dakota v Wayfair Inc, Overstock.com Inc & Newegg, Inc, 2017 SD 56 (2017).

[2] 386 US 753 (1967).

[3] 504 US 298 (1992).

[4] 135 S Ct 1124 (2015).

© 2020 Varnum LLPNational Law Review, Volume VII, Number 271


About this Author

Wayne D. Roberts, Corporate tax attorney, Varnum

Wayne is a member of Varnum’s Tax Team. His practice includes all aspects of federal and state tax planning and tax litigation. He represents both closely-held and Fortune 100 companies in tax disputes with the IRS, the Michigan Department of Treasury, and revenue departments in Pennsylvania, Indiana, Tennessee, New York, California and numerous other state and local taxing jurisdictions. 

Erin Haney, Tax attorney, Varnum

Erin is a member of Varnum's Tax Practice Team. As a former senior auditor for the Michigan Department of Treasury, she is experienced in Michigan tax compliance and controversy matters. Erin is also a certified public accountant, and she worked as a tax consultant for a major accounting firm prior to pursuing a career in law. During law school she served as a research assistant reviewing updates for the Guidebook to Michigan Taxes and completed an internship with the United States District Court for the Western District of Michigan.