Reasonable Answer Done the Wrong Way: Supreme Court Overturns Quill in South Dakota v. Wayfair, Inc.

Author:Donnini, Gerald J., II
Position:Tax Law
 
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The U.S. Supreme Court gave states a reason to celebrate and online retailers with shoppers alike, a reason to mourn the days of avoiding sales tax. Although often incorrectly pegged as a new "internet tax" in the media, the U.S. Supreme Court decided South Dakota v. Wayfair, Inc., et al., Case No. 17-494 (2018), on June 21, 2018. Rather than creating a "new tax" on internet sales, the Supreme Court examined whether a state could force a retailer with no in-state physical presence to collect and remit its tax. In the past, if a retailer lacked physical presence in a state, the state was previously left with no choice but to rely on its residents to pay the proper tax to the state directly. Studies on the issue suggest that only about 4 percent of consumers actually report tax, which results in lost revenue to the states of approximately $33 billion annually. (1)

By way of brief background, for the imposition of a state tax to be constitutional, there must be a "substantial nexus" between the activity being taxed and the taxing state. (2) Despite the shifting economy from predominantly intrastate activity to the interstate nature of the mail order sales marketplace of the 1990s, the Supreme Court affirmed its then 25-year-old case. (3) Specifically, the Court's holding in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), required a company to be physically present in the state to meet the substantial nexus requirement for sales tax collection purposes. (4) Since the Supreme Court's punt and explicit plea in Quill for Congress to resolve the physical presence dilemma through legislation in 1992, e-commerce sales have grown to an estimated $453.5 billion, while Congress has failed to address the issue. (5) Given the growing online sales marketplace, the lack of consumer compliance, the inaction by Congress, and the alleged lost revenue, what is a state to do?

Apparently, one solution is to enact emergency and admittedly unconstitutional legislation to force remote sellers without a physical presence to collect sales tax. (6) Despite being in direct conflict with roughly 50 years of Supreme Court precedent, the South Dakota law (the act) was necessary because Quill was "causing revenue losses and imminent harm" and was "necessary for the support of the state government." (7) Specifically, the act provided that if a remote seller delivered more than $100,000 of sales into South Dakota or 200 or more separate transactions within a one year period, the remote seller had sufficient nexus "as if the seller had a physical presence." (8)

South Dakota followed the act's enactment by filing a declaratory judgment action against Wayfair, Inc., Overstock.com, Inc., and Newegg, Inc. (collectively "Wayfair"), all of which conducted far more than 200 transactions in South Dakota and had annual sales ranging from $1.7 billion to $4.7 billion. (9) Interestingly, South Dakota agreed the act was unlawful and to further its goal of "expeditious judicial review," it agreed to an order of summary judgment in favor of Wayfair. (10) The South Dakota Supreme Court moved almost as efficiently and quickly in ruling in favor of Wayfair as well. (11) In its opinion, the South Dakota Supreme Court stated, "[h]owever persuasive the state's arguments on the merits of revisiting the issue, Quill has not been overruled and remains the controlling precedent on the issue of Commerce Clause limitations on interstate collections of...

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