The Slow-Me State: The Emergence of Internet Sales Taxation and Missouri's Anomalous Response: S. Dakota v. Wayfair, Inc.

AuthorHawley, Claire

    In South Dakota v. Wayfair, Inc., the United States Supreme Court fundamentally reshaped more than a century of precedent on the Dormant Commerce Clause. While this decision carries far-reaching implications, this Note is primarily concerned with its impact on state sales taxation and Missouri's anomalous--and extremely costly--response. The authority of states to levy taxes on interstate commerce has traditionally been limited to retailers with a physical in-state presence. (1) Founded on Due Process and Commerce Clause considerations, this rule was originally articulated in response to attempts by state governments to tax the sales of mail-order retailers. (2) Over time, largely due to the explosive growth of e-commerce, this rule became grossly misaligned with the realities of the modern economy and unduly burdensome on state taxation authorities. (3) Large online retailers like Amazon and eBay were legally able to avoid paying state sales and use tax on goods shipped to state residents. (4) Amidst growing opposition from the states, the physical presence rule was recently abrogated by the Supreme Court in Wayfair.5 Now, states can collect sales and use tax from out-of-state sellers as long as those sellers have a "substantial nexus" within the state. (6) In the wake of Wayfair, almost all of the states with an existing sales tax regime have enacted legislation to implement an Internet sales tax. (7) Missouri is one of two states that has yet to do so. (8) What is causing this anomalous delay and, most importantly, what is it costing Missouri residents? This Note ultimately concludes Missouri's delay--which is caused by the complexity of its existing sales tax regime and the Republican-controlled state legislature's gridlock--is costing its residents an estimated $165 million every year.


    The Constitution, which authorizes Congress to "regulate Commerce with foreign Nations, and among the several States," is silent on the states' authority to levy taxes on interstate commerce. (9) As a result, courts have wrestled with the Dormant Commerce Clause since the early nineteenth century. (10) Two primary principles have emerged: First, states may not discriminate against interstate commerce. (11) Second, states may not impose undue burdens on interstate commerce. (12) While the Dormant Commerce Clause has traditionally been used to prohibit state taxation of commercial interests that are foreign or purely interstate, judicial interpretations of the Commerce Clause have evolved over time. (13)

    1. State Taxation of Interstate Commerce

      In Leloup v. Port of Mobile, the Supreme Court held that "no State has the right to lay a tax on interstate commerce in any form." (14) This broad prohibition was later narrowed, as the Court began to distinguish between direct and indirect burdens on interstate commerce. Direct burdens were unconstitutional, while indirect burdens were not. (15) In Western Live Stock v. Bureau of Revenue and subsequent decisions, the Court rejected this formal, categorical analysis and adopted a "multiple-taxation doctrine" that focused not on whether a tax was "direct" or "indirect" but rather on whether a tax subjected interstate commerce to a risk of multiple taxation. (16) The Supreme Court briefly revived the direct/indirect distinction in Freeman v. Hewit, which invalidated Indiana's imposition of a gross receipts tax on a particular transaction because that application would "impos[e] a direct tax on interstate sales." (17)

      Finally, in Complete Auto Transit, Inc. v. Brady, the Court announced the rule that has governed state taxation ever since. (18) Complete Auto characterized the direct/indirect distinction as "attaching constitutional significance to a semantic difference." (19) The Court then went on to emphasize the importance of looking past "the formal language of the tax statute [to] its practical effect" and set forth a four-part test that governs the validity of state taxes under the Commerce Clause. (20) The Court will sustain a tax so long as it: (1) applies to an activity with a substantial nexus with the taxing state; (2) is fairly apportioned; (3) does not discriminate against interstate commerce; and (4) is fairly related to the services provided by the state. (21)

    2. Application of the Complete Auto Test

      Against this backdrop, the Supreme Court began to rule on several cases in which states were attempting to tax retailers without a physical in-state presence. In National Bellas Hess, Inc. v. Department of Revenue of State of Illinois, the plaintiff was a national mail order retailer with its principal place of business in Missouri. (22) The State of Illinois attempted to collect a use tax from the plaintiff-retailer on goods shipped to Illinois residents. (23) The Supreme Court held that the plaintiff lacked the requisite minimum contacts with the forum state required by the Due Process Clause and the Commerce Clause. (24) In what has since become known as the physical presence rule, the Court in Bellas Hess effectively limited state taxation powers to retailers with a physical presence, such as "retail outlets, solicitors, or property within a State." (25)

      In 1992, the Court reexamined the physical presence rule in Quill Corp. v. North Dakota By & Through Heitkamp (26) The facts of the case closely resemble those of Bellas Hess: North Dakota was attempting to require an out-of-state mail-order seller to pay use tax on goods purchased for use within the state. (27) As in Bellas Hess, the Court ruled in favor of the plaintiff-retailer. (28) However, the Quill Court overruled the due process holding in Bellas Hess (29) and instead reaffirmed the physical presence rule under the Commerce Clause alone. (30) The Court reasoned that this was necessary to prevent undue burdens on interstate commerce by, for example, subjecting retailers to tax collection in thousands of different taxing jurisdictions. (31) Quill grounded the physical presence rule in Complete Auto's requirement that taxes have a "substantial nexus" with the activity being taxed. (32) The precedent established by Quill was dutifully followed for more than two decades, meaning out-of-state companies that shipped goods ordered via catalog into the consumer's state were beyond the reach of state taxation.


    While the physical presence rule has always had its critics, (33) opposition increased exponentially with the dawn of the Cyber Age and, more specifically, e-commerce. The criticism coalesced around a single argument: Physical presence is not necessary to create a substantial nexus. (34) At the time of Quill and Bellas Hess, the Internet was still an unknown concept to a majority of the public, and it seemed fair to assume that, for the foreseeable future, most major retailers in a state market would need some degree of physical presence to be successful. Thus, the physical presence rule was interpreted in the context of the mail-order catalog industry. Until recently, the thriving online retail industry was afforded the very same protection from state taxation. (35) Critics argued this gave online retailers a competitive advantage over in-state retailers and allowed them to unfairly deprive states of tax revenue. (36) The purpose of the Commerce Clause is not "to relieve those engaged in interstate commerce from their just share of state tax burden." (37)

    This problem was not entirely unforeseen by the Bellas Hess and Quill Courts. The dissent in Bellas Hess argued, "There should be no doubt that this large-scale, systematic, continuous solicitation and exploitation of the Illinois consumer market is a sufficient 'nexus' to require Bellas Hess to collect from Illinois customers and to remit the use tax." (38) In Quill, three Justices based their decision to uphold the physical presence rule on stare decisis alone. (39) In his dissent, Justice White went so far as to argue that "there is no relationship between the physical-presence/nexus rule the Court retains and Commerce Clause considerations that allegedly justify it." (40) Since then, the Court's criticism of the rule has only intensified. Justice Kennedy voted for the result in Quill but recently urged "[t]he legal system" to "find an appropriate case for this Court to reexamine" it because it would be "unwise to delay any longer." (41) Justice Thomas, also a member of the Quill majority, similarly advocates for its abandonment.42 Justice Gorsuch joined in as well, commenting that Quill gave its own rule an "expiration date," setting it up to "wash away with the tides of time." (43)

    1. The Cost of Bellas Hess and Quill

      "It is estimated that Bellas Hess and Quill cause the States to lose between $8 and $33 billion" in sales and use tax revenue every year. (44) Unsurprisingly, state legislatures have tried to address this issue in several ways. For example, Massachusetts proposed a regulation that defined physical presence to include apps available for download by in-state residents and cookies placed on in-state residents' web browsers. (45) Ohio adopted a similar standard. (46) Other states have enacted "click through" nexus statutes, which define nexus to include out-of-state sellers that contract with in-state residents who refer customers for compensation. (47) Colorado and other states have imposed notice and reporting requirements on out-of-state retailers that do not remit sales tax. (48) The Alabama Department of Revenue issued a regulation, effective January 1, 2016, that applied its state sales tax to an "out-of-state seller" with more than $250,000 in "tangible personal property sold into the state" during the previous year. (49) As discussed below, one state went so far as to pass a law in direct contravention of Quill and Bellas Hess.

    2. South Dakota Goes Rogue

      In 2016, the South Dakota State Legislature passed Senate Bill 106 ("SB 106"), which authorized the collection of sales tax...

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