June 21, 2018

Supreme Court Decides South Dakota v. Wayfair Inc.

On June 21, 2018, the United States Supreme Court decided South Dakota v. Wayfair, Inc., No. 17-494, holding that states can require out-of-state sellers to collect and remit sales tax on goods shipped to the state, even if the seller has no physical presence in the state. In so holding, the Court overruled its prior decisions in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), and National Bellas Hess Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967).

Under the Court’s prior decisions in Quill and Bellas Hess, states were prohibited, under application of the Commerce Clause, U.S. Const., Art. I, § 8, cl. 3, from requiring a business that has no physical presence in a state to collect and remit sales tax to that state. Despite this prohibition, South Dakota enacted legislation requiring an out-of-state seller to collect sales tax on goods shipped to South Dakota if in a given year the seller delivers more than $100,000 of goods or services into the State or has 200 or more separate transactions for the delivery of goods or services into the State.

After the Act was passed, South Dakota filed a declaratory judgment action against three online retailers, Wayfair, Inc., Overstock.com, Inc., and Newegg, Inc. Based on Quill and Bellas Hess, the trial court granted summary judgment to the retailers, holding the Act was unconstitutional. The South Dakota Supreme Court affirmed.

The Supreme Court reversed and remanded, holding that states may require out-of-state sellers to collect and remit sales tax on goods and services shipped into states, even if the sellers do not have a physical presence in the state. In doing so, the Court overruled its decisions in Quill and Bellas Hess.

The Court looked to the Commerce Clause’s boundaries of a State’s ability to regulate interstate commence to reason that Quill and Bellas Hess were incorrectly decided and should be overruled. The Court reasoned that a physical presence is not necessarily required for there to be a “substantial nexus with the taxing State.” In fact, selling goods and services into a state may establish a sufficient nexus depending on the amount and frequency of the sales. Second, Quill creates, rather than resolves, market distortions by incentivizing sellers to limit their physical presence and even encouraging tax evasion by consumers who are responsible for remitting use tax in many states when the seller does not collect sales tax. Finally, Quill’s physical presence distinction is arbitrary and formalistic, which the Court reasoned is not supported by modern Commerce Clause jurisprudence.

In reversing and remanding for further proceedings, the Court concluded the substantial nexus test was met, and that Wayfair, Overstock.com, and Newegg each has a substantial nexus with the taxing state based on economic and virtual contacts in South Dakota. The Court remanded so that other Commerce Clause principles that were not litigated or briefed in the courts below, such as whether the Act is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services the State provides, can be addressed. See Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977).

Justice Kennedy delivered the opinion of the Court, in which Justices Thomas, Ginsburg, Alito, and Gorsuch joined. Justices Thomas and Gorsuch filed concurring opinions. Chief Justice Roberts filed a dissenting opinion, in which Justices Breyer, Sotomayor, and Kagan joined.

Download Opinion of the Court.

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