The state of South Dakota’s effort to challenge current federal law about the collection and remittance of sales tax on online orders placed by residents with out-of-state-merchants fell flat this week.
Judge Mark W. Barnett, of South Dakota’s sixth judicial circuit, granted a summary judgment dismissing a lawsuit brought by South Dakota’s Department of Revenue against Wayfair Inc., Overstock.com Inc. and Newegg Inc., citing federal law established by Quill v. North Dakota in 1992. The Quill decision prohibits states from imposing sales tax collection and remittance obligations on retailers that lack a physical presence, known as nexus, in the state.
“This Court is duty bound to follow applicable precedent of the United States Supreme Court,” Barnett writes in his ruling. “This is true even when changing times and events clearly suggest a different outcome; it is simply not the role of a state circuit court to disregard a ruling from the United States Supreme Court.”
It’s a shame so many states are copying South Dakota by passing admittedly unconstitutional laws hoping against hope the U.S. Supreme Court will overturn its Quill ruling.
The suit was an effort to force the e-retailers to comply with a remote seller sales tax law passed by the South Dakota legislature and signed into law by Gov. Dennis Daugaard last March. The law required retailers with no physical presence in South Dakota to register with the state by April 25 and begin complying with the law as of May 1. The state law requires out-of-state merchants that sell at least $100,000 or complete 200 or more transactions annually with South Dakota residents to register. When Wayfair, Overstock.com and Newegg did not register with the state, the Department of Revenue filed suit against them April 26.
Jonathan Johnson, chairman of Overstock.com, No. 29 in the Internet Retailer 2016 Top 500 Guide, says the ruling was predictable and states are being wasteful in litigating tax collection laws they pass that are unconstitutional. “It’s a shame so many states are copying South Dakota by passing admittedly unconstitutional laws hoping against hope the U.S. Supreme Court will overturn its Quill ruling. These states are wasting taxpayer funds litigating these laws, and they are forcing companies to defend these bogus suits,” he said. “We’re surprised the trial court didn’t issues sanctions against South Dakota for bringing this frivolous law suit. This ruling further supports what Overstock and many other retailers have long ascertained; interstate commerce should be regulated at a federal level. It seems we are now one step closer to that actually happening.”
Wayfair (No. 24 in the Top 500), declined to comment on the ruling. Newegg (No. 17) did not immediately return requests for comment.
“We are pleased that the state court has affirmed that South Dakota’s law is in flagrant violation of the Constitution and established Supreme Court precedent,” says Hamilton Davison, president and executive director of the American Catalog Mailers Association, an industry trade group representing retailers that has vocally opposed South Dakota’s effort.
South Dakota is one of a handful of states trying to challenge the precedent established by Quill as efforts to change the law have stagnated at the federal level. Alabama and Colorado have also passed state laws that challenge Quill. Congress has for years made efforts to introduce legislation, but none have become law. (Read about what the current Congress may do about it here.)
However, in December, the U.S. Supreme Court refused to hear an appeal from the Direct Marketing Association regarding the Colorado law, which effectively lets the Colorado law stand. In 2015, Justice Anthony Kennedy wrote an opinion to say that the court should at some point revisit the 1992 case.