The most public challenge to Quill is now ready to be presented to the U.S. Supreme Court, as the South Dakota Supreme Court in the case of State of South Dakota v. Wayfair, SD SC, Case No. 28160 rule South Dakota’s tests for when an out of state seller must collect and remit sales tax unconstitutional. The next question is whether the Supreme Court, which does not often show interest in tax cases, will take the opportunity to hear this case when the State of South Dakota files its appeal to the Court.
The State of South Dakota is hoping the Supreme Court believes now is the time to get rid of the physical presence test that was left in place in the Quill case. The Supreme Court’s opinion in Quill gave, at best, lukewarm support for keeping the test in place, doing so largely because that’s what had been decided before. The opinion suggested that if there had not been prior case law the Court would not have imposed this test and, as well, left open the door to reconsidering the issue later.
As we have discussed in other posts, this is one of three broad methods being used by states to attempt to increase collections of sales and use taxes by having out of state sellers, especially internet based ones, collect more sales tax. Other states have attempted to claim a very broad definition of “physical presence” to include the use of affiliates sellers in the state and the like (see Massachusetts) to simply “chip away” at the impact of Quill, while others have enacted “tattletale” laws that require sellers not to collect and remit the tax, but rather to report names and addresses of buyers in the state.
The latter two options have, to date, fared reasonably well in the federal courts, most significantly when the Tenth Circuit in Direct Marketing Association v. Brohl upheld Colorado’s tattletale law, a holding the Supreme Court declined to review on appeal. The appellate panel held that because there was no tax collection required, Quill was not relevant to a determination of whether a state could impose this requirement on out of state businesses.
But South Dakota is looking to render the need to use those two methods unnecessary by getting the Supreme Court to revisit the entire concept of the physical presence test. The South Dakota Legislature enacted a law (S.B. 106) that clearly violated Quill and was meant as a vehicle to get the issue before the Supreme Court again. For that reason, the state is not necessarily upset that it lost at the state level, knowing the goal was to get the Supreme Court to hear the case.
As the South Dakota Supreme Court opinion described South Dakota’s law:
Senate Bill 106 was introduced during the session as: “An Act to provide for the collection of sales taxes from certain remote sellers, to establish certain Legislative findings, and to declare an emergency.” S.B. 106, 2016 Legis. Assemb., 91st Sess. (S.D. 2016). The Act provided that any sellers of “tangible personal property” in South Dakota without a “physical presence in the state . . . shall remit” sales tax according to the same procedures as sellers with “a physical presence[.]” Id. § 1. However, the Act limited this obligation to sellers with “gross revenue” from sales in South Dakota of over $100,000 per calendar year or with 200 or more “separate transactions” in the state within the same time frame. Id. §§ 1-2. The Act authorized the State to bring a declaratory judgment action in circuit court against any person believed to meet the Act’s criteria “to establish that the obligation to remit sales tax is applicable and valid under state and federal law.” Id. § 2. The Act further authorized a motion to dismiss or a motion for summary judgment in the action. Id. It also provided that the filing of the action “operates as an injunction during the pendency of the” suit prohibiting the State from enforcing the Act’s obligations. Id. § 3. Other sections of the Act prohibited retroactive application of the obligation to remit sales tax and made the obligation prospective only from the date of dissolution or lifting of an injunction provided for by the Act. Id. §§ 5-6.
The state filed suit shortly after the bill took effect, triggering the legislative injunction against any enforcement but allowing the challenge to move forward.
One of the reasons the state believed the time was ripe to attempt to get the Supreme Court to hear this case related to the Brohl case mentioned earlier. Initially the question arose whether the federal courts had the right to hear the challenge to Colorado’s law, a question that was finally resolved by the United States Supreme Court. As the South Dakota Supreme Court opinion describes the matter:
In 2015, the Supreme Court reviewed a Colorado law that instead of imposing the obligation to collect and remit use tax on sellers with no physical presence in that state, imposed the obligation “to notify . . . customers of their use-tax liability and to report” sales information back to the state. Direct Marketing, __ U.S. at __, 135 S. Ct. at 1127. The issue before the Supreme Court was whether the United States District Court had jurisdiction under the Tax Injunction Act (28 U.S.C. § 1341) over a suit challenging the new law on Commerce Clause grounds. Justice Kennedy, however, took the opportunity to write a concurrence questioning the advisability of continuing to follow Bellas Hess and Quill in light of later Commerce Clause jurisprudence and “in view of the dramatic technological and social changes that [have] taken place in our increasingly interconnected economy.” Id. at __, 135 S. Ct. at 1135 (Kennedy, J., concurring). Despite noting the “startling revenue shortfall in many States” due to Bellas Hess and Quill, Justice Kennedy observed that Direct Marketing did not raise reconsideration of those decisions “in a manner appropriate for the Court to address it.” Id. Nevertheless, he concluded that Direct Marketing provided “the means to note the importance of reconsidering doubtful authority.” Id. He invited “[t]he legal system [to] find an appropriate case for [the Supreme] Court to reexamine Quill and Bellas Hess.” Id.
The State Supreme Court, in deciding for the out of state sellers, found that the requirements imposed violated the physical presence test of Quill. Consider the law was designed to challenge Quill, the finding that there was no inherent reason why internet sellers should be treated differently than the mail order seller that was the subject of the Quill case is likely one that South Dakota is happy with.
The South Dakota Supreme Court concluded simply that the question of whether Quill should be overturned is one that only the U.S. Supreme Court could answer affirmatively. As the opinion states:
However persuasive the State’s arguments on the merits of revisiting the issue, Quill has not been overruled. Quill remains the controlling precedent on the issue of Commerce Clause limitations on interstate collection of sales and use taxes. We are mindful of the Supreme Court’s directive to follow its precedent when it “has direct application in a case” and to leave to that Court “the prerogative of overruling its own decisions.” Rodriguez de Quijas v. Shearson/American Exp., Inc., 490 U.S. 477, 484, 109 S. Ct. 1917, 1921-22, 104 L. Ed. 2d 526 (1989). Therefore, we affirm.
South Dakota has announced it plans to file with the U.S. Supreme Court by mid-October. The next step after that filing is to wait to see if the Supreme Court decides to hear this case or rather denies the request to hear this case.