The state of South Dakota has filed a lawsuit against four big online retailers seeking to force them to comply with a new state law that requires them to collect and remit sales tax even if they have no physical presence in South Dakota.
The state on Thursday sued Newegg Inc., No. 17 in the Internet Retailer 2016 Top 500 Guide; Overstock.com Inc. (No. 29); Systemax Inc. (No. 32); and Wayfair LLC. (No. 24) in a circuit court in Hughes County, where the state capital of Pierre is located. The suit seeks the court to affirm that South Dakota may require the four web-only retailers to collect and remit sales tax.
The lawsuit is explicitly aimed at forcing the U.S. Supreme Court to reverse its 1992 ruling in a case known as Quill Corp. v. North Dakota in which the high court rules that only a company with a physical presence in a state—such as a store, office or warehouse—could be required to collect sales tax from state residents. The lawsuit says in the first paragraph of the summary, “The State acknowledges that a declaration in its favor will require abrogation of the United States Supreme Court’s decision in Quill Corp. v. North Dakota.”
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Matt Strathman, associate general counsel at Newegg, said Friday, “This lawsuit is a direct attack on established U.S. Supreme Court precedent that retailers around the nation have relied upon for decades. Newegg believes South Dakota’s new law is unconstitutional, and intends to defend itself vigorously.” Wayfair declined to comment. The two other retailers named in the lawsuit did not immediately respond to requests for comment.
The lawsuit is based on legislation that South Dakota Gov. Dennis Daugaard signed into law March 22. It requires retailers to register by April 25 with the state Department of Revenue, committing to comply with the law as of May 1. Or retailers can notify the state that they do not meet the requirements of the law, which only apply to out-of-state merchants that sell at least $100,000 or complete at least 200 transactions annually with South Dakota residents. The law authorizes the state to sue retailers that fail to register without having to first levy assessments on those retailers.
The state Department of Revenue sent notices to 206 retailers saying they likely would meet the criteria set out in the law, and 40 have registered to collect the tax so far, a department spokesman says. In its lawsuit the state says the Revenue Department developed a formula based on its own data to determine which retailers would be required to register under the law. He would not elaborate on the formula, or comment on why Amazon.com Inc. (No. 1 in the Top 500) wasn’t among those sued.
Amazon, which has opened over 100 distribution and sorting centers around the country, collects sales tax in 28 states, but not in South Dakota. Amazon declined to comment.
Meanwhile, the American Catalog Mailers Association and NetChoice, trade associations for catalog and online retailers, on Friday sued South Dakota, challenging the constitutionality of the state’s law. That suit also was filed with the circuit court in Hughes County, South Dakota.
The trade associations allege South Dakota’s new sales tax law violates federal law, and ask that the law be set aside immediately, says Steve DelBianco, NetChoice executive director. The groups’ suit claims the South Dakota law violates the U.S. Constitution’s Commerce Clause and guarantees of due process. The Commerce Clause says Congress alone can regulate interstate commerce, and the due process provisions require a definite link and minimum connection between the state and a person it seeks to tax. “An out-of-state retailer whose only connection with South Dakota is to fulfill the South Dakota customers’ requests does not meet the minimum contact test of the due process clause,” DelBianco says.
“The South Dakota law acknowledges it would require a change in federal constitutional doctrine,” DelBianco says. “The law was designed to fast-track to the state Supreme Court and on to the U.S. Supreme Court this challenge to the Quill doctrine.”
South Dakota doesn’t like that bricks-and-mortar retailers collect the sales tax but online retailers don’t, says Stephen P. Kranz, partner with McDermott Will & Emery LLP, the law firm that successfully represented Quill before the U.S. Supreme Court in the 1992 case. Quill Corp. was a catalog retailer of office supplies and equipment that subsequently was acquired by Staples Inc., No. 5 in the Top 500 and No. 21 in the 2016 B2B E-Commerce 300, which ranks the leading companies in North America by their online sales to businesses, government agencies and other enterprises.
“They (South Dakota) are trying to force all retailers to collect sales tax or haul those who don’t up to the U.S. Supreme Court,” Kranz says. The aim is to try to overturn the 1992 Supreme Court decision that protected companies without a physical presence in a state from collecting sales tax, Kranz says.
“The questions being raised are ultimately constitutional questions that would need to be reviewed by the U.S. Supreme Court,” Kranz says of both lawsuits.
Kranz says more than 12 state legislatures have enacted laws challenging the 1992 Supreme Court decision and he expects as many as eight more will do so this year.
South Dakota has now joined Alabama and Colorado in becoming the front-line aggressors in this battle, Kranz says. Louisiana this year tried to force out-of-state online retailers to collect sales tax by defining relationships with marketing websites that send traffic to retailer sites as constituting a physical presence in the state. That prompted Amazon to cut off ties to affiliate websites in Louisiana to avoid having to collect sales tax there.
Jessica Melugin, adjunct fellow for the Competitive Enterprise Institute, a free-market think tank, says smaller retailers are especially burdened by having to calculate and remit sales taxes and maintain the software required to do so. “If you add on a state’s ability to drag these retailers into South Dakota court, that’s also a huge cost and a time burden for these retailers,” she says. “It’s going to be a business killer in some cases.”
Melugin cites a September 2013 study by retail industry experts Larry Kavanagh and Al Bessin that estimated midmarket online and catalog retailers (those who do $5 million-$50 million in annual sales) will spend $80,000-$290,000 in setup and integration costs for the “free software” promised by advocates of the Marketplace Fairness Act. That proposal, reintroduced in March 2015 after dying during a 2013 congressional session, would require out-of-state sellers to collect and remit sales tax. But Congress has not acted on the proposal in the current session. The study says retailers would spend $57,500-$260,000 annually on maintenance, updates, audits and service fees charged by software providers in order to comply with the Marketplace Fairness Act.
45 states and the District of Columbia have sales taxes. Of those, 24 states—including South Dakota—have instituted some form of simplified collection process for out-of-state online and catalog retailers who voluntarily collect the tax. South Dakota calls its process the Streamlined Sales and Use Tax system. The states pay for software that tallies the tax for the remote sellers who volunteer to collect it, according to data cited in February by Neal Osten, director of the Washington, D.C., office of the National Conference of State Legislatures. The organization supports bills that have been submitted to Congress in recent years requiring retailers to collect and remit sales tax on online and catalog orders, regardless of where the retailer is based. Another 13 states are considering legislation requiring the sales-tax collection, the organization says.