AuthorMiller, Eric C.


"The inability to effectively collect the sales or use tax from remote seriously eroding the sales tax base of this state, causing revenue losses and imminent harm to this state through the loss of critical funding for state and local services." (1) The negative effect on South Dakota caused by the physical presence tax shelter for remote sellers was the basis for South Dakota's challenge to the physical presence rule. (2) The physical presence rule required a seller to have a sufficient physical presence in a State before the seller was required to collect and remit sales taxes. (3)

South Dakota Governor Dennis Daugaard estimated the loss in tax revenue because of the physical presence rule at $50 million. (4) South Dakota received roughly $4 million in collected sales taxes from remote sellers who voluntarily collected and remitted sales taxes to South Dakota; however, this was a small portion of the estimated $50 million revenue loss caused by the physical presence rule. (5) The estimated loss in tax revenue from the physical presence rule was growing substantially on the national level from $16.1 billion in 2003 to $23 billion in 2012. (6) This shows a substantial growth in the loss of tax revenue due to the physical presence rule. (7)

South Dakota does not have state income tax, and therefore any loss in tax revenue from the physical presence rule has an even stronger impact on the State because of its strong reliance on sales tax. (8) South Dakota's primary method of dealing with lost revenue from the physical presence rule was to increase the sales tax rate in the State. (9) This increase in sales tax may exacerbate South Dakota's loss because "customers are much more sensitive to a $0.01 of sales tax than they are to $0.01 of item price even though both values have the same effect on the total price." (10) This increase in sales tax to make up for the physical presence revenue shortfall could only have an even more negative impact on South Dakota. (11) South Dakota took a different approach to addressing revenue shortfalls by challenging the physical presence rule through Senate Bill (S.B.) 106. (12) South Dakota's challenge to the physical presence rule ultimately set the foundation for South Dakota v. Wayfair, Inc. (13)

This note argues in favor of the majority in South Dakota v Wayfair, Inc. on four points. First, the majority is correct that the "nexus" requirements with both Due Process and the Commerce Clause are intertwined, and physical presence is not a requirement of the "substantial nexus" test for either. (14) Second, stare decisis should not be a legitimate excuse for the courts to continue reinforcing bad law if a substantial burden developed from the bad law. (15) Third, the safe harbor demarcation developed by National Bellas Hess v. Department of Revenue (16) and hardened by Quill Corp. v. North Dakota (17) was formalistic and was counter to the fundamental Commerce Clause principle of fairness and evening the playing field regarding interstate commerce. (18) Finally, the scheme developed by South Dakota should be the standard by which other states in the union enact legislation regarding remote sellers, and if other states do not follow South Dakota's lead, they do so at their own peril. (19)


In 2016, the South Dakota Legislature answered Justice Kennedy's call for an "appropriate reexamine" the physical presence rule. (20) South Dakota introduced Senate Bill (S.B.) 106 with the title: "An Act to provide for the collection of sales taxes from certain remote sellers, to establish certain legislative findings, and to declare an emergency." (21) S.B. 106, which was later codified as South Dakota Codified Laws (S.D.C.L.) section 10-64, aimed at answering Justice Kennedy's call, and expressly specified Justice Kennedy and Direct Marketing Association v. Brohl (22) as the driving force in the statute. (23) The Act set forth that any remote seller with either over $100,000 in sales or over 200 transactions in the State of South Dakota must collect and remit sales taxes as if the remote seller had a physical presence in South Dakota. (24) The Act also provided, if there are challenges to the constitutionality of the Act, an injunction will be enacted, which would freeze implementation of the Act until its constitutionality was decided. (25) The Act also declared an emergency, which triggered a "two-thirds majority vote in both house of the Legislature necessary for it to pass." (26)

Both Senators and Representatives in the South Dakota Legislature sponsored and introduced S.B. 106, and the Senate referred the bill to a hearing. (27) With no opposition, S.B. 106 easily passed its way through committee, and on February 19, 2016, the Senate passed the bill unanimously. (28) On February 22, 2016, S.B. 106 had the first reading by the State House of Representatives, and the House sent the bill to committee for debate. (29) The committee debated the bill, and it easily passed committee with no opposition. (30) S.B. 106 passed the House with only two nays on March 1, 2016, and the Governor signed the bill into law on March 22, 2016. (31) The passed statute included South Dakota's call for an emergency regarding loss of tax revenue. (32)

The South Dakota Department of Revenue began notifying applicable remote sellers of the requirement to collect and remit sales taxes. (33) Wayfair, Inc. and other remote sellers failed to follow the notices, and South Dakota filed a declaratory judgment in circuit court. (34) The remote sellers attempted to remove the case to the U.S. District Court. (35) The District Court denied the removal, and in circuit court, the remote sellers filed a motion for summary judgment based on the contention that S.B. 106 was unconstitutional for Commerce Clause reasons, which the circuit court granted. (36)

The State of South Dakota appealed to the South Dakota Supreme Court to review the circuit court's decision granting summary judgment to Wayfair and the other remote sellers. (37) The South Dakota Supreme Court in State v. Wayfair, Inc. (38) addressed whether S.B. 106 was constitutional in light of the Commerce Clause. (39) The South Dakota Supreme Court held since the physical presence rule developed in Bellas Hess and reinforced in Quill was still valid law, that South Dakota's attempt to tax remote sellers was unconstitutional. (40)

The State of South Dakota filed a writ of certiorari with the United States Supreme Court, and the Court granted certiorari in order to reconsider "the scope and validity of the physical presence rule" as mandated by Bellas Hess and Quill. (41) On June 21, 2018, the Court decided South Dakota v. Wayfair, and held South Dakota S.B. 106 was constitutional. (42) The Court held "the physical presence rule of Quill [was] unsound and incorrect," and overruled Bellas Hess and Quill. (43)



    Article I, section 8, clause 3 of the United States Constitution provides Congress the power "[t]o regulate Commerce...among the several States." (44) The Framers of the Constitution recognized a failure in the regulation of commerce under the Articles of Confederation, and addressed the "tendencies toward economic Balkanization that had plagued relations among the Colonies and later among the States" by the addition of the Commerce Clause to the Constitution. (45) Congress has the authority to "redefine the distribution of power over interstate commerce." (46) Therefore, Congress, through legislation, may allow the States to regulate what otherwise may be impermissible under the Commerce Clause. (47)

    The Commerce Clause has an implicit negative effect that may prohibit a State's ability to regulate interstate commerce. (48) The dormant Commerce Clause "prohibits certain state actions that interfere with interstate commerce," even though the prohibitions are not expressly stated in the Commerce Clause. (49) While Congress has the power to define interstate commerce, Congress has provided the courts with the power to formulate the rules. (50)

    The interpretation of the Commerce Clause requires an understanding of what constitutes "commerce;" how far the Commerce Clause reaches; and how far the Commerce Clause limits state regulation of commerce. (51) Commerce is defined to include not only the buying and selling of items, but also interstate navigation of those items. (52) States may regulate interstate commerce in some instances, for example, the Supreme Court allowed a state to regulate an interstate water system. (53)

    As time went on, the Court polished the Commerce Clause doctrine to find a suitable balance between Federal and State powers. (54) In a later case, the Court held a State may regulate commerce because Congress chose not to do so, the issue was a local issue, and the regulation did not conflict with Federal legislation. (55)

    The Court set boundaries on state authority to regulate interstate Commerce and focused on two principles; (1) whether the state regulations are discriminatory on interstate commerce, (56) and (2) whether the burden on interstate commerce outweighs the local benefits received. (57) The Court held that states may not develop laws that discriminate against out-of-state parties conducting commerce in state. (58) With limited exceptions, laws that provide "differential treatment of instate and out-of-state economic interest that benefits the former and burdens the latter" violate the Commerce Clause. (59) If the Court determines a law is discriminatory towards interstate commerce, then that law is virtually per se invalid. (60) The second principle is that state law must not put an excessive burden on interstate commerce in relation to the local benefits. (61) The benefits of the regulation must outweigh the burdens on interstate commerce in order to pass muster. (62) Thus, if a regulation is aimed at a...

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