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South Dakota v. Wayfair, Inc.

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Supreme Court of the United States
South Dakota v. Wayfair
Term: 2017
Important Dates
Argument: April 17, 2018
Decided: June 21, 2018
Outcome
South Dakota Supreme Court vacated
Vote
5 - 4
Majority
Anthony Kennedy • Clarence Thomas • Ruth Bader Ginsburg • Samuel Alito • Neil Gorsuch
Concurring
Clarence Thomas • Neil Gorsuch
Dissenting
Chief Justice John G. Roberts • Stephen Breyer • Sonia Sotomayor • Elena Kagan •


South Dakota v. Wayfair was argued during the October 2017 term of the U.S. Supreme Court. The court heard argument April 17, 2018. The case came on a writ of certiorari to the South Dakota Supreme Court.

HIGHLIGHTS
  • The case: South Dakota sought to challenge earlier U.S. Supreme Court rulings prohibiting states from imposing sales taxes on merchants who sold products in the state but did not have any physical presence in the state. South Dakota passed a sales tax on internet merchants and then requested a declaratory judgment from a state court that internet merchants must comply with the tax. Citing U.S. Supreme Court caselaw, the lower court concluded and the state supreme court affirmed the sales tax was unconstitutional. South Dakota then appealed to the U.S. Supreme Court.
  • The issue: "Should this Court abrogate Quill's sales-tax-only, physical-presence requirement?"[1]
  • The outcome: In a 5 - 4 decision, the Supreme Court vacated the South Dakota Supreme Court ruling.[2]


    • You can review the lower court's opinion here.[3]

    Aftermath

    Responses in state legislatures

    States responded to the Wayfair decision by implementing already-approved laws, passing new legislation, or issuing directives and regulations.

    As of December 2019, 43 states plus the District of Columbia had some form of law, directive, or regulation to collect sales taxes from out-of-state sellers. Of those, 23 states had an implementation date in 2018. Four states plus the District of Columbia had a January 1, 2019, effective date. 16 states had some other implementation date.[4][5][6][7]

    Sources:

    Nevada

    New Hampshire

    New Jersey

    South Dakota

    Utah

    Background

    Legal question

    South Dakota v. Wayfair, Inc. was a case about the Commerce Clause of the United States Constitution and a 1992 U.S. Supreme Court case, Quill Corp. v. North Dakota (hereafter referred to as "Quill").

    The Commerce Clause "generally grants exclusive authority to Congress to regulate trade between the States." In a 1967 case, National Bellas Hess, Inc. v. Illinois ("Bellas Hess"), the Supreme Court ruled "the Commerce Clause prohibited Illinois from requiring a mail order seller in Missouri to collect and remit use tax to Illinois for merchandise sold and shipped into that state." In other words, the court concluded Illinois could not impose a sales tax on a merchant who was not physically present in the state, even if the merchant was doing business with people in Illinois. In 1992, the Supreme Court reaffirmed that decision in Quill. Citing Bellas Hess, the court ruled North Dakota could not impose a sales tax on an out-of-state mail-order business.[3]

    The issue in Wayfair was whether the Supreme Court should revisit its ruling in Quill and hold that states may constitutionally impose a sales tax on out-of-state merchants doing business with their citizens.

    Case background

    In 2016, the South Dakota Legislature passed Senate Bill 106 (SB 106), an act requiring sellers with no physical presence in the state to pay state sales taxes. SB 106 only applied to out-of-state merchants "with gross revenue from sales in South Dakota of over $100,000 per calendar year or with 200 or more separate transactions in the state within the same time frame."[3]

    After the governor signed SB 106, the state Department of Revenue issued notices to out-of-state sellers it believed fell within the act's requirements. Some sellers who received notices failed to register for tax licenses. South Dakota filed suit against those sellers in state court, seeking a declaratory judgment that the sellers had to comply with the tax requirements. The sellers argued Bellas Hess and Quill rendered SB 106 unconstitutional. South Dakota acknowledged those decisions bound the state court and "indicated its intention to pursue review of the issue by the United States Supreme Court." Citing Quill, the South Dakota circuit court ruled in favor of the sellers, and the state appealed.[3]

    Panel opinion

    On appeal, the South Dakota Supreme Court affirmed the circuit court's ruling. The court held:

    “ In view of...the Supreme Court’s holdings in Bellas Hess and Quill, Senate Bill 106 could not impose a valid obligation on Sellers to collect and remit sales tax to this State because none of them had a physical presence in the state. See Bellas Hess, 386 U.S. at 758-60, 87 S. Ct. at 1392-93 (rejecting imposition of 'the duty of use tax collection and payment upon a seller' with no physical presence in the taxing state); Quill, 504 U.S. at 317-18, 112 S. Ct. at 1916 (reaffirming Bellas Hess’s Commerce Clause limitations in rejecting a state’s attempt to require a seller with no physical presence in the state to collect and pay use tax for goods sold in the state). We see no distinction between the collection obligations invalidated in Quill and those imposed by Senate Bill 106, and hold that the circuit court correctly applied the law when it granted Sellers’ motion for summary judgment.[3][23] ”


    South Dakota then appealed to the Supreme Court.[1]

    Petitioner's challenge

    The petitioners challenged the holding of the South Dakota Supreme Court. They argued the Supreme Court should reconsider its ruling in Quill.[3]

    Certiorari granted

    On October 6, 2017, the petitioner initiated proceedings in the Supreme Court of the United States in filing a petition for a writ of certiorari to the South Dakota Supreme Court. The U.S. Supreme Court granted the petitioner's request for certiorari January 12, 2018. SCOTUS heard argument April 17.[1]

    Question presented

    Question presented:

    "Should this Court abrogate Quill's sales-tax-only, physical-presence requirement?"[1]

    Audio

    • Audio of oral argument:[24]



    Transcript

    • Transcript of oral argument:[25]

    Outcome

    Decision

    In a 5 - 4 decision, the U.S. Supreme Court vacated the South Dakota Supreme Court ruling. The Supreme Court overruled both Quill and Bella Hess.[2]

    Majority opinion

    Justice Anthony Kennedy authored the majority opinion, joined by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito, and Neil Gorsuch.

    Kennedy wrote that two principles from the court's precedents defined the limits of a state's ability to regulate interstate commerce: "First, state regulations may not discriminate against interstate commerce; and second, States may not impose undue burdens on interstate commerce." Under a case, Complete Auto (1977), the court will uphold a state tax "so long as it (1) applies to an activity with a substantial nexus with the taxing State, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services the State provides."[2]

    Kennedy then addressed Bellas Hess and Quill. The physical presence rule, he wrote, "has been the target of criticism over many years from many quarters." In Kennedy's view, as time passes, the physical presence rule becomes "further removed from economic reality and results in significant revenue losses to the States." He continued, "These critiques underscore that the physical presence rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause." The Quill case, Kennedy wrote, "created an inefficient online sales tax loophole that gives out-of-state businesses an advantage.[2]

    “ In effect, Quill has come to serve as a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a State’s consumers—something that has become easier and more prevalent as technology has advanced . . . The Quill Court itself acknowledged that the physical presence rule is artificial at its edges. That was an understatement when Quill was decided; and when the day-to-day functions of marketing and distribution in the modern economy are considered, it is all the more evident that the physical presence rule is artificial in its entirety. Modern e-commerce does not align analytically with a test that relies on the sort of physical presence defined in Quill . . . This Court should not maintain a rule that ignores these substantial virtual connections to the State[2][26][23] ”


    "For these reasons," Kennedy wrote, "the Court concludes that the physical presence rule of Quill is unsound and incorrect. The Court’s decisions in Quill Corp. v. North Dakota and National Bellas Hess, Inc. v. Department of Revenue of Ill. should be, and now are, overruled." For the companies in this case, he concluded, "the substantial nexus requirement of Complete Auto is satisfied.[2]

    Concurrence by Justice Thomas

    Justice Clarence Thomas joined the majority's opinion and also wrote separately. Thomas wrote he should have taken the opportunity to advocate for overturning Bellas Hess in an earlier case:

    “ Justice Byron White joined the majority opinion in National Bellas Hess, Inc. v. Department of Revenue of Ill.. Twenty-five years later, we had the opportunity to overrule Bellas Hess in Quill Corp. v. North Dakota. Only Justice White voted to do so. I should have joined his opinion . . . Like Justice White, a quarter century of experience has convinced me that Bellas Hess and Quill can no longer be rationally justified. The same is true for this Court’s entire negative Commerce Clause jurisprudence. Although I adhered to that jurisprudence in Quill, it is never too late to surrende[r] former views to a better considered position. I therefore join the Court’s opinion.[2][27][23] ”


    Concurrence by Justice Gorsuch

    Justice Neil Gorsuch joined the majority's opinion and also wrote separately. While he agreed with the court's conclusions, Gorsuch wrote to express his doubts over the court's other dormant Commerce Clause cases. "My agreement with the Court’s discussion of the history of our dormant commerce clause jurisprudence," he wrote, "should not be mistaken for agreement with all aspects of the doctrine."[2]

    “ The Commerce Clause is found in Article I and authorizes Congress to regulate interstate commerce. Meanwhile our dormant commerce cases suggest Article III courts may invalidate state laws that offend no congressional statute. Whether and how much of this can be squared with the text of the Commerce Clause, justified by stare decisis, or defended as misbranded products of federalism or antidiscrimination imperatives flowing from Article IV’s Privileges and Immunities Clause are questions for another day.[2][28][23] ”


    Dissent by Chief Justice Roberts

    Chief Justice John Roberts dissented from the majority's opinion, joined by Justices Stephen Breyer, Sonia Sotomayor, and Elena Kagan. Roberts would have reaffirmed Bellas Haas and Quill. Roberts argued the principle of stare decisis applied with particular force in matters of commerce because Congress holds the authority to regulate interstate commerce. Stare decisis dictates that precedents are to be followed by future courts. While Roberts agreed Bellas Hess had been incorrectly decided, he argued that overturning the decision could cause more problems than it solved.[2]

    “ Nothing in today’s decision precludes Congress from continuing to seek a legislative solution. But by suddenly changing the ground rules, the Court may have waylaid Congress’s consideration of the issue. Armed with today’s decision, state officials can be expected to redirect their attention from working with Congress on a national solution, to securing new tax revenue from remote retailers . . . The Court is of course correct that the Nation’s economy has changed dramatically since the time that Bellas Hess and Quill roamed the earth. I fear the Court today is compounding its past error by trying to fix it in a totally different era. The Constitution gives Congress the power '[t]o regulate Commerce . . . among the several States.' Art. I, §8. I would let Congress decide whether to depart from the physical-presence rule that has governed this area for half a century.[2][29][23] ”


    Text of the opinion

    See also

    Footnotes

    1. ↑ 1.0 1.1 1.2 1.3 Supreme Court of the United States, South Dakota v. Wayfair, Inc. Question Presented, January 12, 2018
    2. ↑ 2.00 2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 2.09 2.10 United States Supreme Court, "South Dakota v. Wayfair, Inc. Opinion," June 21, 2018
    3. ↑ 3.0 3.1 3.2 3.3 3.4 3.5 South Dakota Supreme Court, South Dakota v. Wayfair, Inc. Opinion, September 13, 2017
    4. ↑ Bloomberg, "State of Wayfair: Indiana Settles, Maryland Adopts Emergency Rule," August 29, 2018
    5. ↑ Bloomberg, "South Dakota Special Session to Decide Future of Online Sales Tax (1)," August 30, 2018
    6. ↑ Tax Foundation, "Post-Wayfair Options for States," August 29, 2018
    7. ↑ Sales Tax Institute, "Remote Seller Nexus Chart, updated December 16, 2019
    8. ↑ 8.0 8.1 Nevada Appeal, "Nevada to collect sales tax for online purchases," September 27, 2018
    9. ↑ SeacoastOnline, "NH law aims to protect against out-of-state online sales taxes," July 19, 2019
    10. ↑ 10.0 10.1 10.2 New Hampshire Public Radio, "N.H. Legislature Fails to Pass Challenge to Internet Sales Tax," July 25, 2018
    11. ↑ 11.0 11.1 Concord Monitor, "Update: Back to drawing board after N.H. House rejects sales tax bill," July 25, 2018
    12. ↑ 12.0 12.1 New Hampshire Governor Chris Sununu, "Governor Sununu Announces Executive Branch Action Regarding the Wayfair Decision," August 23, 2018
    13. ↑ Insider NJ, "Senate Approves Internet Tax Fairness Bill," July 1, 2018
    14. ↑ NorthJersey.com, "Supreme Court ruling on online sales tax could mean windfall for New Jersey," June 21, 2018
    15. ↑ Bloomberg, "State of Wayfair: New Jersey Governor Wants Tweaks," August 28, 2018
    16. ↑ NJBiz.com, "Legislative committees approve tax on out-of-state businesses," September 24, 2018
    17. ↑ Bloomberg, "State of Wayfair: So Many Marketplace Facilitator Questions," September 27, 2018
    18. ↑ New Jersey Legislature, "Senate Budget and Appropriations Committee statement to Senate, No. 2990," September 24, 2018
    19. ↑ South Dakota State News, "Gov. Daugaard Signs Special Session Bills," September 12, 2018
    20. ↑ 20.0 20.1 KSFY, "State lawmakers approve online sales tax measures in special session," September 12, 2018
    21. ↑ 21.0 21.1 South Dakota State News, "State of South Dakota Reaches Settlement In Remote Seller Law Litigation," October 31, 2018
    22. ↑ Associated Press, "Utah Legislature passes requirement for online sales tax," July 19, 2018
    23. ↑ 23.0 23.1 23.2 23.3 23.4 Note: This text is quoted verbatim from the original source. Any inconsistencies are attributable to the original source.
    24. ↑ Supreme Court of the United States, South Dakota v. Wayfair, Inc., argued April 17, 2018
    25. ↑ Supreme Court of the United States, South Dakota v. Wayfair, argued April 17, 2018
    26. ↑ Citations and quotations omitted.
    27. ↑ Citations and quotations omitted.
    28. ↑ Citations and quotations omitted.
    29. ↑ Citations and quotations omitted.
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