Two groups are challenging each other over sales tax collection in South Dakota, but their goal is likely the same: To take U.S. Supreme Court Justice Anthony Kennedy up on his invitation to legally define nexus in a technological era far different than when the court last considered the issue.
“Last year, in his concurring opinion in DMA v. Brohl, Justice Kennedy asked the legal system to develop a case so that the U.S. Supreme Court could reexamine the court’s holding in Quill,” said Deborah White, president of the Retail Litigation Center, an organization that advocates on behalf of retailers in relevant judicial proceedings and is affiliated with the Retail Industry Leaders Association. “The State of South Dakota has done just that.”
While the ultimate goal for South Dakota, and even groups opposing the law, is simple (to get a firm and binding legal definition of nexus), the legislative and legal processes leading to this point have been less so.
On March 22, 2016, South Dakota Gov. Dennis Daugaard (R) signed legislation requiring remote retailers that have annual gross revenue in the state in excess of $100,000 or that conduct more than 200 transactions in the state to collect and remit sales tax to the state. The law, which was sponsored by Sen. Deb Peters (R–9), went into effect on May 1.
But the legislation includes “unique procedural rules in an effort to expedite review by the South Dakota Supreme Court,” legal website Lexology reported. The law itself stipulates that it cannot be enforced until its constitutionality has been “established by a binding judgment, including, for example, a decision” from the U.S. Supreme Court, thereby initially restricting the South Dakota Department of Revenue from assessing remote sellers that meet either of the thresholds in the law. Furthermore, if the law is upheld, remote sellers will not face liability for back taxes prior to the court’s affirmation of the bill’s constitutionality.
The bill also requires the state’s Department of Revenue to seek a declaratory action in circuit court against a business that “allegedly meets either or both of S.B. 106’s economic nexus thresholds,” according to Lexology.
On Thursday, April 28, South Dakota’s Department of Revenue did just that and in their motion named online retailers Wayfair Inc., Systemax Inc., Overstock.com Inc., and Newegg Inc. as defendants, reported Corporate Counsel. In its complaint, the state asks the court to confirm that it can require the named defendants to collect and remit sales tax for items delivered into South Dakota.
The Retail Litigation Center applauded South Dakota for “developing litigation that should ultimately enable the U.S. Supreme Court to reconsider its decision in Quill, which does not reflect the reality of 21st century technology,” White said, and the center is urging the state’s courts to act quickly.
“Today’s retailers can be virtually ‘present’ everywhere. A legal rule that artificially distinguishes between retailers with physical stores inside a state’s geographic borders and without such stores is an anachronism today,” he added.
A day after the state filed, on Friday, April 29, the American Catalog Mailers and NetChoice filed a declaratory action challenging the constitutionality of the South Dakota sales and use tax law. The groups want the state court to declare the law unconstitutional, arguing that it violates the physical presence rule from the 1992 Supreme Court ruling Quill vs. North Dakota.
The complaint alleges that “because S.B. 106 violates the Quill physical presence requirement, usurps the role of Congress in regulating interstate commerce, and unlawfully expands the state’s taxing authority over companies, individuals, and organizations located throughout the United States, and potentially the world, based solely on their having customers in South Dakota, the law is plainly unconstitutional.”
“If the constitutionality of the legislation is affirmed,” Lexology said, “the Department [of Revenue] will require out-of-state sellers that meet the economic nexus thresholds in S.B. 106 to collect and remit sales tax for sales to South Dakota purchasers…. The outcome of South Dakota’s legislation will produce ripples felt nationwide.”