By: Karen T. Syrylo, CPA

As expected, the State of South Dakota on October 2, 2017 filed its petition to the U.S. Supreme Court, following the state supreme court’s September 13 decision in WAYFAIR INC., OVERSTOCK.COM, INC., and NEWEGG INC. The state’s high court had held that South Dakota’s economic presence statute for sales tax nexus was invalid because it was in direct conflict with the U.S. Supreme Court’s Quill decision. The statute requires sales tax collection by any vendor who has more than $100,000 of sales to South Dakota customers or 200 or more transactions in the state. See our prior coverage.

While the petition seeks “review [of] a judgement of the supreme court of South Dakota,” the question presented in the filing is “Should this Court abrogate Quill’s sales-tax-only physical-presence requirement?”

We previously wrote that this South Dakota litigation was, from the start, intended to be the 50-states’ vehicle to get the issue of sales tax nexus in front of the U.S. Supreme Court, with the goal of having the Quill decision and its physical presence nexus requirement reconsidered and retired. It is clear that the cert petition had been drafted long before the September 13, 2017 state supreme court ruling, in order for the state to be ready with its 38 pages a mere 3 weeks later. In fact, page 12 of the petition specifies “South Dakota filed this petition within weeks of the opinion below, to facilitate a possible decision this Term.”

So now we wait to hear whether the Supreme Court will in fact grant cert and hear the case.

The full statement of the “question presented” is a full two paragraphs:

In 1967, this Court held that the dormant commerce clause prohibits a State from requiring catalog retailers to collect sales taxes on sales into the State unless the retailer is “physically present” there. Nat’l Bellas Hess v. Dep’t of Rev. of Ill., 386 U.S. 753 (1967). That rule, questionable even then, became an isolated outlier when Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977), held that only a “substantial nexus” was needed for other state taxes affecting interstate commerce. In Quill Corp. v. North Dakota, 504 U.S. 298 (1992), this Court was asked to correct that aberration. But despite a vigorous dissent—and the lack of a similar, “physical presence” rule for any other type of tax, id. at 317—this Court tentatively retained the requirement on stare decisis grounds.

The legal and practical developments of the past 25 years strongly recommend revisiting that judgment. Quill has grown only more doctrinally aberrant, and has been roundly criticized by members of this Court, including Justices Kennedy, Thomas, and Gorsuch. But while its legal rationales have imploded with experience, its practical impacts have exploded with the rapid growth of online commerce. Today, States’ inability to effectively collect sales tax from internet sellers imposes crushing harm on state treasuries and brick-and-mortar retailers alike. “Given these changes …, it is unwise to delay any longer a reconsideration of the Court’s holding in Quill.” Direct Mktg. Ass’n v. Brohl, 135 S. Ct. 1124, 1135 (2015) (Kennedy J., concurring). The question presented is: Should this Court abrogate Quill’s sales-tax-only, physical-presence requirement?

In the 38 pages of the petition the state covers much ground with several approaches to its argument that the Court should hear their case now and that the Quill physical presence rule is now wrong and should be removed. The petition describes a history of Quill and Quill’s predecessor case, the Supreme Court’s ruling in National Bellas Hess which articulated the physical presence requirement for sales tax, as well as history of mail order and internet selling. It also takes issue with the contention that multistate sales tax compliance is an unfair complication and cost to businesses today, given the advances in computer capabilities and software products that handle the process (South Dakota reports that one of the internet sellers who chose not to be part of this litigation began charging the state sales tax the day after they made that decision).


The state discusses details of the following reasons for what it asks of the Court:

  1. The issue is exceptionally important, because:
    1. Local governments are severely and increasingly harmed by Quill – Governments are deprived of sales tax revenues, reportedly almost a $40 billion loss nationally likely for 2018, and the problem is growing worse as more and more sales move online; “Absent this Court’s intervention, state and local governments will only fall farther and farther behind.”
    2. Quill also unfairly harms local brick-and-mortar businesses – “Quill tilts the economic playing field against these companies – including many small, local businesses – draining the local economy and upsetting the fair, competitive dynamic that makes the free market work.”
    3. Quill harms interstate commerce itself – “Firms maximize the effective subsidy of Quill [of not charging sales tax] if they minimize their interstate presence and instead stick to shipping from one State to all the others.”
  2. Quill should be overruled because:
    1. The physical presence rule is incorrect – Here the South Dakota argument relies on their analysis of another U.S. Supreme Court decision, Complete Auto Transit, Inc. v. Brady and the first prong of the Court’s four-part test for taxes on out-of-state businesses. The Court ruled in Complete Auto that states may impose taxes that 1) are applied to an activity with a substantial nexus with the taxing state, 2) are fairly apportioned, 3) do not discriminate against interstate commerce, and 4) are fairly related to the services provided by the taxing state. South Dakota notes that the “four-part test imposes no physical-presence requirement” and that the required substantial nexus concerns not just nexus between the complaining firm and the taxing state, but rather the nexus between the taxed activity and the taxing state.” They contend that with “South Dakota’s safe-harbor limiting the tax collection duty to companies that consummate 200 sales or $100,000 worth of business in its very small market, the existence of a ‘substantial nexus’ is beyond dispute.”
    2. Stare decisis no longer justifies keeping the physical presence ruleStare decisis is “to stand by things decided” meaning to leave in place prior decisions already decided. The Court in Quill did focus on the principle of stare decisis in leaving in place the results of its prior National Bellas Hess ruling, i.e. the physical presence rule for sales tax nexus. In the instant case, South Dakota argues that “But looking to the stare decisis factors this Court identified in Quill and elsewhere now shows that the ‘special justifications’ exist for doing away with the physical-presence rule. These factors include whether the rule: (1) is constitutional or statutory; (2) has engendered legitimate reliance interests; (3) has been undermined by changed circumstances; (4) has been consistently criticized and is not seen as sufficiently inconsistent with other doctrine that it is ‘a positive detriment to coherence … in the law’; and (5) has proven ‘unworkable’ and/or ‘outdated … after being ‘tested by experience.’” The petition delineates the state’s support for why all of the factors have now been satisfied. Their conclusion is “Whatever was true in 1992, the physical-presence rule now fares poorly on each of these factors.”
  3. The question presented requires immediate review:
    1. The states cannot afford delay because they cannot afford the lost revenue, the negative impact on their ability to provide government services, the effects on local communities, and the effects on brick-and-mortar businesses.
    2. There is widespread activity in many other states that have enacted nexus laws that go against Quill’s physical presence rule. But the litigation over those statutes “are lagging well behind this one, and multiple states and businesses could find themselves engaged in years of costly and unnecessary litigation if this Court were to defer this issue for another day.”
    3. There are “strong institutional reasons to grant his petition.” The state notes that they filed this petition “in reliance on an express invitation of one of this Court’s members,” i.e. Justice Kennedy, in his comment regarding Quill in the Direct Marketing Ass’n v. Brohl case, in which he urged “the legal system to find an appropriate case to reexamine it [Quill]”; and that “the entire machinery of South Dakota’s government came together to bring this issue before the Court” via a carefully drafted statute and expedited state court process.

So, now we wait, but for what?

Will the U.S. Supreme Court hear the South Dakota case and overturn Quill? If so, will all states enact “economic nexus” statutes, and what will they look like? Note that the current statutes contain differences, for example in the threshold amounts — $10,000, $100,000, $250,000. Can the states agree among themselves for uniform provisions, perhaps using the Streamlined Sales Tax agreement process? Will there be need for federal legislation to create uniformity that businesses and states can live with?

Will the Supreme Court hear the South Dakota case and maintain Quill’s physical presence rule, or decline to hear the case? If so, what further litigation will we see, and how will the states increase their activity imploring Congress to pass one of the several proposals that would legislatively overturn Quill?