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Why You Should Care About South Dakota’s Controversial Online Sales Tax Law

A state that doesn't collect income tax may be the one that gets the Supreme Court to rethink its views on online sales tax collection.

There aren’t even a million people living in South Dakota, but the state’s efforts to collect sales tax from online retailers could eventually have an impact on the hundreds of millions of Americans in other states who shop online.

Sure, Amazon now collects the appropriate sales taxes in all but the five states that don’t currently have a sales tax (Alaska, Delaware, Montana, New Hampshire, and Oregon), but not because it has to. In fact, there is no federal law regarding the collection of online sales tax, and the most important legal precedent on this matter goes back to the pre-internet era to a 1992 Supreme Court decision involving the other Dakota.

25 Years Ago…

The case of Quill Corp. v. North Dakota involved a mail-order office supply company (Quill) that provided software to customers that allowed them to place orders remotely and to check Quill’s inventory.

The state of North Dakota argued that this was tantamount to Quill doing business in the state, and that the company should therefore be required to collect and remit sales tax on purchases made by its North Dakota customers.

The Supreme Court disagreed, saying in its unanimous ruling that the Quill software didn’t create a nexus sufficient enough to merit the collection of state taxes.

Tax-Free(ish) Shopping

As Amazon and other online-only retailers grew, they took Quill to imply that they had no obligation to collect sales tax in any state since they had no physical retail locations. And despite outcry from some traditional retailers, this “tax-free” shopping went virtually unchecked for quite some time.

(This is where we once again remind everyone that just because a retailer doesn’t charge you sales tax, it doesn’t alleviate you of any option to pay that tax. Most people don’t, and this parenthetical clarification likely won’t change anyone’s behavior, but hey… we tried.)

As online retail became more popular, states started noticing that their tax revenues weren’t what they used to be. After the collapse of the housing market sent every local government looking for more cash, some states specifically targeted Amazon with laws that required sales tax collection if the e-tailer had third-party marketplace sellers located in that state. Amazon reached deals to pay taxes in some states, while cutting off affiliate programs in others.

Then there were the states that noticed that Amazon had warehouses in their borders, and concluded that having a distribution warehouse in a state was sufficient for meeting the physical presence standard established in Quill. At first, Amazon responded by shutting down some warehouses, but then it ultimately realized it could use jobs and capital investment money as leverage, making deals in multiple states to construct new facilities while also collecting sales tax.

The Crackdown

But just because Amazon agreed to collect sales tax somewhere doesn’t mean it’s the law, or that other, smaller e-tailers — those without networks of warehouses or third-party affiliates — also have to collect in states where they have no physical presence.

A handful of states have tried passing new laws that explicitly require sales tax collection from most online retailers. This includes South Dakota, where in 2016 the governor signed into law a piece of legislation that replaces the “physical presence” standard with one based on sales volume and revenue.

Under the new law, it doesn’t matter where your company is located. If you sell more than $100,000 in stuff to — or have at least 200 transactions with — people in South Dakota in any given year, you’d have to collect sales tax.

Shortly after the law was passed, the state asked a judge to proactively declare that retailers must comply with the law. Coming at it from the other side, the American Catalog Mailers Association and NetChoice, an online retail trade group sued to block the law from being enforced, as did online retailers NewEgg,, and Wayfair.

The retailers argued that they don’t meet the requirements under Quill to be required to collect sales tax, and the state didn’t challenge that argument. In fact, the state told the circuit court judge that its goal is to get this matter before the Supreme Court in the hope of changing the standards established in Quill.

So the circuit court judge didn’t even hold any hearings, instead granting summary judgment in favor of the NewEgg and the other e-tailers.

This week, South Dakota’s plan to get this before the U.S. Supreme Court inched closer to a possibility, with the state’s highest court affirming the circuit court summary judgment.

“We see no distinction between the collection obligations invalidated in Quill and those imposed by [the South Dakota law],” explains the South Dakota Supreme Court in its opinion [PDF]. “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.”

On To The Supremes?

By all accounts, South Dakota now intends to appeal the case to SCOTUS, arguing that technology and retail culture has undergone a seismic shift in the 25 years since Quill. But there is no obligation on the high court’s part to take up this case; the best South Dakota can do is file a petition and hope justices deem this dispute worth reviewing.

And some on the bench just might. Justice Anthony Kennedy has gone on the record as expressing a desire to reconsider Quill. In a concurring opinion in Direct Marketing Association v. Brohl, Kennedy admitted that he and his SCOTUS colleagues may have gotten Quill, even at the time that it was decided.

According to Kennedy, he was among those justices whose decision in the case was based solely on a legal precedent set decades earlier. The result was a SCOTUS ruling that Kennedy says is “now inflicting extreme harm and unfairness on the States.”

The South Dakota lawmakers appear to have tailored their tax law to fit a concept outlined in Kennedy’s Direct Marketing opinion.

“There is a powerful case to be made that a retailer doing extensive business within a State has a sufficiently ‘substantial nexus’ to justify imposing some minor tax-collection duty, even if that business is done through mail or the Internet,” wrote Kennedy, saying that because of that 1992 decision, states have been unable to collect many of the taxes due on the trillions of dollars that Americans spend on e-commerce each year.

The National Retail Federation — a trade group representing bricks-and-mortar retail companies — said today that it is “more than happy” at the notion of the Supremes revisiting the Quill question, but that it would rather see the matter resolved through federal legislation instead of the court system.

“It’s time for Congress to pass a law that recognizes the evolution in the retail industry over the past two-and-half decades and say that online sellers should no longer be given an unfair advantage over Main Street merchants,” said NRF Senior Vice President David French in a statement.

However, the NRF statement appears to gloss over the fact that any federal law forcing state-level tax collection on online retailers will undoubtedly be challenged in court, and that regardless of whether it’s the South Dakota law or a federal bill, anything that doesn’t mesh with the standards set by Quill would have to be settled by the Supreme Court.

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