South Dakota v. Wayfair, Inc.


Should state and local governments be allowed to require out-of-state online retailers to collect sales and use taxes?

Oral argument: 
April 17, 2018

The Supreme Court will decide whether to overturn Quill Corp. v. North Dakota, which held that the Commerce Clause prohibits states from imposing sales or use taxes on out-of-state sellers. Petitioner South Dakota argues that in modern times, a business may not have a physical presence in a state, yet still satisfy the “substantial nexus” requirement as articulated in Complete Auto Transit v. Brady. South Dakota further argues that increases in electronic commerce, concerns with states’ ability to collect adequate revenues, and overall changes in the national economy favoring online sellers weigh in favor of overturning Quill, despite stare decisis. In contrast, Respondent Wayfair, Inc. argues that changes in market conditions do not justify overturning Quill, especially when the underlying constitutional concerns of restraints on interstate commerce remain. Wayfair further argues that imposing sales taxes on remote sellers will unfairly burden small businesses with appreciable compliance costs, especially as the largest online sellers, such as Amazon, already voluntarily pay state sales taxes. If the Court rules in South Dakota’s favor, online retailers will be subject to state sales and use taxes, and likely raise the prices of the goods they sell. If the Court instead rules in Wayfair’s favor and upholds Quill, online retailers will continue to have an apparent advantage compared to local brick-and-mortar businesses.

Questions as Framed for the Court by the Parties 

Whether the Supreme Court should abrogate Quill Corp. v. North Dakota's sales-tax-only, physical-presence requirement?


In 1992, the Supreme Court decided Quill Corp. v. North Dakota, which held that a state cannot force a business without a physical presence in the state to collect sales taxes. State v. Wayfair Inc., 901 N.W.2d. 754.

Petitioner South Dakota, lacking a state income tax, has relied on sales taxes for an appreciable amount of its revenue. Id. at 755. By 2016, South Dakota was acutely aware of its inability to collect sufficient taxes in part because South Dakotans were increasingly purchasing goods online from out-of-state vendors. Id. at 758. In response to this concern, the South Dakota Legislature passed and the governor signed into law Senate Bill 106 (the “Act”). Id. The Act requires sellers of “tangible personal property” who lack a physical presence in South Dakota but have total sales exceeding $100,000 annually or two hundred or more “separate transactions” annually in the state to collect the state sales tax. Id.

The Act permits South Dakota to enforce its provisions by bringing a declaratory judgment action in circuit court against a qualified seller. Id. South Dakota explicitly passed the Act with the intent to challenge Quill and related Commerce Clause decisions. Id. at 756. The Act itself alludes to Justice Kennedy’s concurrence in Direct Marketing Association v. Brohl, in which Justice Kennedy states that the Court should reconsider Quill in the future. S.B. 106, 2016 Legis. Assemb., 91st Sess. (S.D. 2016).

After the Act was signed into law, the South Dakota Department of Revenue sent notices to certain out-of-state sellers, which informed them of the Act’s requirements and advised them to register for a South Dakota sales tax license. Wayfair Inc., 91 N.W.2d 754. Respondents Wayfair, Inc.,, Inc., and Newegg, Inc. (“Wayfair”) were all sellers that lacked a physical presence in South Dakota and did not register for the state’s sales tax licenses. State v. Wayfair, Inc., 229 F. Supp. 3d 1026. Each of these sellers, however, did meet either the $100,000 in total sales or two hundred separate transactions requirement of the Act. Wayfair Inc., 901 N.W.2d 754.

On April 28, 2016, South Dakota filed a declaratory judgment action against Wayfair in state court, asking the court to declare that the Act was valid and applicable to Wayfair. Id. at 759. Wayfair filed a motion for summary judgment, arguing that the Act violated the Commerce Clause. Id. at 759–760. South Dakota agreed that under Quill, Wayfair was entitled to summary judgment because Wayfair did not have a physical presence in South Dakota. Id. at 760. On March 6, 2017, the South Dakota trial court granted Wayfair’s motion for summary judgment. Id. The Supreme Court of South Dakota affirmed the trial court’s decision on September 13, 2017. Id. at 761. South Dakota subsequently filed a petition for a writ of certiorari with the United States Supreme Court, and the Court granted the petition on January 12, 2018.



South Dakota argues that the Act should not be upheld under Quill Corp. v. North Dakota because that rule runs contrary to the Commerce Clause as it was interpreted in Complete Auto Transit, Inc. v. Brady. Brief for Petitioner, South Dakota at 21. South Dakota contends that the Act would be upheld under Complete Auto, despite Quill’s bright-line physical presence requirement. Id. at 22. South Dakota asserts that a sale going into a state, as has occurred here, is sufficient to meet the “substantial nexus” requirement under Complete Auto, although it fails the physical presence requirement under Quill, and questions whether the nexus of a company, rather than just the transaction, should be a part of the Court’s analysis at all. Id. at 22–23. South Dakota also contends that the safe harbor provision of the Act, which requires that a company do a certain amount of business in the state to come under the Act, makes it so the Act only applies to companies who have a clear substantial nexus to the state. Id. at 23. South Dakota explains that the safe harbor provision prevents the Act from applying to companies conducting less than 200 transactions or doing less than $100,000 of business in South Dakota per year and concludes that companies that do more than this easily meet the substantial nexus requirement for both persons and transactions, especially considering South Dakota’s small economy. Id.  

Wayfair counters that Quill, and the rejection of the Act under Quill, is consistent with Commerce Clause jurisprudence. Brief for Respondent, Wayfair, Inc.,, Inc., and Newegg Inc. at 42. Wayfair emphasizes that the Court has upheld decisions to invalidate taxation without a physical presence on the basis of Quill’s holding that the Commerce Clause limits a state’s ability to engage in this type of taxation. Id. Wayfair also notes that the Court in Quill already addressed and rejected the argument that Quill is inconsistent with Complete Auto, and contends that, as such, South Dakota’s argument that the cases are inconsistent should be disregarded. Id. at 43. As to the question of whether the Court should reconsider applying the nexus requirement to companies, Wayfair points to the Court’s repeated support of the proposition that it should. Id. Wayfair describes the Court’s history with applying the nexus requirement to a company, stating that, three months after Complete Auto, the Court recognized the “sharp distinction” between a nexus for a company and nexus for a transaction in National Geographic Society v. California Board of Equalization. Id. Wayfair then points to a recent case from 2015, in which the Court restates the principle that a state may not tax a company without its physical presence in the state. Id.


South Dakota argues that the Court’s articulated rules for overturning a principle despite the doctrine of stare decisis, which would require adherence to previous decisions, weigh in favor of the Court overturning Quill now. Brief for Petitioner at 51. First, South Dakota asserts that stare decisis has less force when there has been a change of factual circumstances since the decision of the rule to be changed. South Dakota points out that this rule is particularly strong in Commerce Clause cases because the economic considerations underlying a decision are bound to changes in scientific developments or commercial circumstances. Id. at 52. South Dakota points out that, when Quill was decided, a motivating factor in the Court’s decision was that the physical presence requirement’s tendency to promote investment by businesses would outweigh any harm to states or interstate commerce. Id. Now, South Dakota asserts, the rapid expansion of Internet retail has rendered this argument “unsound,” along with the physical presence requirement that the argument led to. Id.

Wayfair argues that the changed market circumstances due to the expansion of internet retail do not overcome stare decisis and do not cure the underlying constitutional concern. Brief for Respondent at 46. Wayfair supports this argument by discussing market considerations when the Court decided Quill. Id. In Quill, Wayfair asserts, North Dakota, seeking for the Court to overrule its decision in National Bellas Hess, Inc. v. Department of Revenue, argued that the expansion of remote commerce through mail orders required the Court to overturn the physical presence requirement from that decision. Id. at 47. Wayfair contends that the Court in Quill rejected that basis for overturning Bellas Hess, even though the market changes from Bellas Hess to Quill were much greater than the market changes from Quill to this case. Id.


South Dakota asserts that reliance concerns do not require application of stare decisis here, as a lack of justified reliance on the prior decision is a valid reason for the Court to not be bound by stare decisis in a given situation. Brief for Petitioner at 54. South Dakota distinguishes the reliance interests from Bellas Hess that were present for the parties in Quill in various ways. Id. Firstly, South Dakota argues, in Quill, mail retailers depended on a bright-line rule from Bellas Hess that they were exempt from state taxation. Here, South Dakota counters, Internet retailers are not exempt from taxation, as Quill only prevented a state from requiring a retailer to collect the tax. Id. at 54–55. Furthermore, South Dakota argues, retailers without an in-state physical presence do not have a reliance interest in avoiding state interference, as Quill still allowed for states to impose equally burdensome requirements on retailers without an in-state physical presence. South Dakota also asserts that the Quill opinion acknowledged the temporariness of the rule and recognized that tax rules are more susceptible to future change. Id. at 55–56.

Wayfair, on the other hand, argues that reliance interests are strong in this case and thus balance in favor of the Court applying stare decisis. Brief for Respondent at 30. Specifically, they argue that the concerns of overburdening out-of-state companies with taxation, specifically compliance burdens, that motivated Bellas Hess and Quill are still strong today, encouraging reliance on these rules. Id. Wayfair asserts that, although new software attempts to ease the burden of multi-state taxation, studies show that it is not effective in doing so. Id. at 31. Furthermore, Wayfair argues that multi-state taxation makes it overly burdensome for companies to administer exemption certificates because many states require their own specific forms to be used for this process. Id. These burdens and costs, Wayfair contends, justify companies’ reliance on Quill and weigh in favor of the Court applying stare decisis. Id. at 30



As noted in the Act itself, South Dakota does not currently have a state income tax and instead relies appreciably on sales and use taxes to fund public expenditures. Brief for Petitioner, South Dakota at 4a. South Dakota argues that its inability to collect taxes from out-of-state sellers has led to serious concerns regarding funding for essential government services. Id. South Dakota asserts that it currently misses out on $50 million in revenue annually because it cannot collect sales taxes from out-of-state sellers, and that all state and local governments combined lose about $23 billion. Id. at 35. If the Court does not overturn Quill’s physical presence rule, South Dakota argues, state and local governments will increasingly receive less and less tax revenue as Internet sales continue to increase. Id.

South Dakota further argues that simply increasing its sales tax will be ineffective because South Dakotans will buy even more goods online from out-of-state sellers in response. Id. at 36. The City of Little Rock, Arkansas (“Little Rock”) argues that the physical presence rule particularly has hurt local governments that rely on sales taxes to provide vital services. Brief of Amicus Curiae Little Rock, in Support of Petitioner at 1, 3. Specifically, Little Rock argues that in 2017 it passed up approximately $1.4 million in tax revenue due to the physical presence rule, while the costs of essential emergency services increased. Id. at 3.

In response, Wayfair contends that South Dakota greatly overestimates the tax revenue losses that result from the physical presence rule. Brief for Respondent, Wayfair, Inc.,, Inc., and Newegg Inc. at 47. Wayfair asserts that state sales tax revenues have in fact increased every year between 2013 and 2016, and were a record high in 2017. Id. at 52–53. Wayfair also argues that the amount of uncollected sales taxes will continue to decrease due to market forces. Id. at 48. Wayfair points out that Amazon, which makes up 60% of projected Internet sales growth, already collects taxes in every state that has a sales tax. Id. at 49–50. Furthermore, according to Wayfair, nineteen of the top twenty online sellers currently collect sales taxes in most states. Id. at 50.


South Dakota argues that the physical presence rule unfairly favors large businesses over small, local businesses. Brief for Petitioner at 37. Four United States Senators (“Senators”) in support of South Dakota argue that the rule benefits out-of-state sellers who can charge a lower, “tax free” price for their goods at the expense of local sellers who must collect a sales tax. Brief of Amicus Curiae Four United States Senators et al., in support of Petitioner at 9–10. South Dakota asserts that consumers are aware of price differences between local goods that are subject to the state tax and goods sold online that are not and accordingly purchase more goods from out-of-state sellers. Brief for Petitioner at 37. As a result, South Dakota contends that this “arbitrage” is not only harming local businesses but also contributing to economic malaise in the community at-large. Id. In addition, Senators argue that if Quill is overturned, states like South Dakota will not waste resources going after small businesses that would owe the state a relatively insignificant amount of sales taxes. Brief of Four United States Senators et al., at 10.

Wayfair argues that overturning Quill will significantly burden small businesses seeking access to new markets with new barriers to entry and compliance costs. Brief for Respondent at 27. Additionally, the American Academy of Attorney-Certified Public Accountants (AAA-CPA), writing in support of Wayfair, contends that states subject businesses to costly tax audits, and that businesses will expend considerable resources responding to audits instead of investing those resources in growing the business. Brief of Amicus Curiae AAA-CPA, in Support of Respondent at 6. AAA-CPA asserts that deficient tax audits can cost small and medium-sized businesses over one hundred thousand dollars. Id. Instead of risking such costs, AAA-CPA argues that businesses will simply refrain from engaging in interstate commerce, to the detriment of the national economy. Id. at 6–7. 


South Dakota contends that the burden of complying with local and state sales tax laws is negligible. Brief for Petitioner at 44. South Dakota asserts that with the prevalence of online tax-compliance providers, compliance costs can be as low as “three-tenths of a penny per transaction.” Id. at 46. Furthermore, South Dakota highlights that it is a member of the Streamlined Sales and Use Tax Agreement (“SSUTA”), which requires simplifying state and local sales taxes and standardizes related procedures among the twenty-three participating states. Id. South Dakota asserts that its acceptance of SSUTA permits sellers to receive free sales tax collection and remittance services from certified service providers (“CSPs”). Id. In addition, the Retail Litigation Center, in support of South Dakota, argues that new technological advances have made the alleged burden of collecting sales taxes a “minor burden.” Brief of Amicus Curiae Retail Litigation Center, in Support of Petitioner at 24. To bolster this point, the Retail Litigation Center points out that Systemax, a former defendant in the original lawsuit, was able to immediately commence collecting sales taxes after reaching a settlement with South Dakota. Id. at 25.         

Wayfair disputes South Dakota’s claim that technological advances have made collecting state sales taxes negligible. Brief for Respondent at 30–31. Wayfair argues that tax software itself can be costly and that it fails to address many of the compliance issues resulting from the 12,000 different taxing jurisdictions nationwide. Id. at 31. Wayfair asserts that definition and exemptions can be inconsistent even in the same state. Id. at 32. In New York, for example, Wayfair notes, clothing purchases can be subject to various inconsistent state and local sales taxes and exemptions, depending on the unit price and number of units sold in a single transaction. Id. at 32–33. Wayfair argues that tax software cannot adequately resolve such inconsistencies, and that an out-of-state seller would have to manually calculate the correct tax due. Id. at 33–34.

In addition, America’s Collectibles Network, Inc. d/b/a Jewelry Television (“JTV”), in support of Wayfair, argues that while technological advances have increased computing power, this has not resulted in fewer costs associated with collecting state sales taxes. Brief of Amicus Curiae JTV, in Support of Respondent at 12. JTV asserts that it relies on complex, internally developed technology systems to run its business, and that integrating new tax collection software into its systems will be costly. Id. at 12–13. JTV alludes to Colorado’s sales tax laws, which also go against the Quill rule. Id. at 13–14. JTV asserts that Colorado government officials themselves agreed that businesses face a “heavy burden” complying with the approximately three hundred unique state and local sales tax regimes. Id. at 15.

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