A Deeper Look at the Supreme Court Sales Tax Ruling

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On Thursday, June 21, in a much-anticipated decision in the case of South Dakota v. Wayfair, Overstock, and Newegg, the U.S. Supreme Court ruled by a vote of 5-4 in favor of a South Dakota law qualifying remote retailers that have $100,000 or more in sales or 200-plus transactions in the state as having a physical presence.

As a result, under the state law these businesses are required to collect South Dakota sales tax on purchases made by state residents. The case reevaluated the 1992 Quill vs. North Dakota decision on what constitutes a physical presence in a state. Voting in the majority were Justice Anthony Kennedy, who wrote the decision, and Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito, and Neil Gorsuch. Voting in the minority were Chief Justice John Roberts and Justices Stephen Breyer, Sonia Sotomayor, and Elena Kagan.

In his majority opinion, Justice Kennedy noted that the 1992 Quill v. North Dakota decision was removed from current economic realities and resulted in providing some retailers an unfair advantage. The ruling was specific to the South Dakota law, however, and so leaves little legal wiggle room for states wanting to enact sales tax fairness laws, according to an analysis of the decision published by The Tax Foundation, which noted, “The Court laid out why South Dakota’s law is no burden to interstate commerce but made clear that more complex or overreaching laws would be.”

Overall, the decision stated that Quill’s physical presence rule is “unsound and incorrect,” noting that it was an incorrect interpretation of the Commerce Clause. The court ruled that:

  • Quill creates rather than resolves market distortions: “It is a judicially created tax shelter for businesses that limit their physical presence in a State but sell their goods and services to the State’s consumers, something that has become easier and more prevalent as technology has advanced. The rule also produces an incentive to avoid physical presence in multiple States, affecting development that might be efficient or desirable.”
  • Quill imposes an arbitrary, formalistic distinction rather than a sensitive, case-by-case analysis of purposes and effects: “It treats economically identical actors differently for arbitrary reasons. For example, a business that maintains a few items of inventory in a small warehouse in a State is required to collect and remit a tax on all of its sales in the State, while a seller with a pervasive Internet presence cannot be subject to the same tax for the sales of the same items.”

In his opinion, Justice Kennedy made clear that the small business exemption in South Dakota’s law provided “a reasonable degree of protection.”

Kennedy explained that the physical presence rule as defined by Quill is “no longer a clear or easily applicable standard; arguments for reliance based on its clarity are misplaced.” He added that the potential for any undue burden on interstate commerce that may arise in the future “cannot justify retaining an artificial, anachronistic rule that deprives states of vast revenues from major businesses.”

“Here, the nexus is clearly sufficient,” Kennedy continued. “The Act applies only to sellers who engage in a significant quantity of business in the State, and respondents are large, national companies that undoubtedly maintain an extensive virtual presence.”

South Dakota’s petition to the Court stemmed from a state law passed in 2016 aimed at challenging the Quill decision, which was issued before the explosive growth of e-commerce. When the U.S. Supreme Court announced its decision to review the case in January, ABA filed an amicus brief in support of South Dakota’s petition and sales tax fairness.