Law School Case Brief
South Dakota v. Wayfair, Inc. - 138 S. Ct. 2080 (2018)
When considering whether a State may levy a tax, Due Process and Commerce Clause standards may not be identical or coterminous, but there are significant parallels. The reasons the United States Supreme Court gave in Quill Corp. v. North Dakota, 504 U.S. 298, 112 S. Ct. 1904, 119 L. Ed. 2d 91 (1992), for rejecting the physical presence rule for due process purposes apply as well to the question whether physical presence is a requisite for an out-of-state seller’s liability to remit sales taxes. Physical presence is not necessary to create a substantial nexus. The Quill majority expressed concern that without the physical presence rule a state tax might unduly burden interstate commerce by subjecting retailers to tax-collection obligations in thousands of different taxing jurisdictions. But the administrative costs of compliance, especially in the modern economy with its Internet technology, are largely unrelated to whether a company happens to have a physical presence in a State.
South Dakota law required out-of-state sellers to collect and remit sales tax “as if the seller had a physical presence in the state.” Sellers are generally required to collect and remit this tax to the Department of Revenue. If for some reason the sales tax is not remitted by the seller, then in-state consumers are separately responsible for paying a use tax at the same rate. Wayfair, Inc., Overstock.com, Inc., and Newegg, Inc., were merchants with no employees or real estate in South Dakota. Wayfair, Inc., was a leading online retailer of home goods and furniture and had net revenues of over $4.7 billion last year.
South Dakota filed a declaratory judgment action against them, seeking a declaration in state court that the requirements of the Act are valid and applicable to respondents and an injunction requiring respondents to register for licenses to collect and remit sales tax. Respondents moved for summary judgment, arguing that the Act is unconstitutional. The trial court granted summary judgment to respondents. On appeal, the South Dakota Supreme Court affirmed. It stated: “However persuasive the State’s arguments on the merits of revisiting the issue, Quill has not been overruled and remains the controlling precedent on the issue of Commerce Clause limitations on interstate collection of sales and use taxes.” The Quill case held that South Dakota may not require a business to collect its sales tax if the business lacks a physical presence in the State. Without that physical presence, South Dakota instead must rely on its residents to pay the use tax owed on their purchases from out-of-state sellers.
Can an out-of-state seller be required to collect and remit that tax to a state?
The United States Supreme Court vacated the Supreme Court of South Dakota's judgment dismissing the State's declaratory judgment action against several remote merchants, and remanded the case. It held that the State of South Dakota was not prohibited under the Commerce Clause of the U.S. Constitution from enacting legislation that required remote sellers to collect and remit sales tax on goods and services sold to buyers for delivery in the State, even though a business that made the sale did not have a physical presence in the State
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