South Dakota v. Wayfair, Inc.

United States Supreme Court
585 U.S. ___ (2018) (2018)

ELI5:

Rule of Law:

The Dormant Commerce Clause does not require a seller to have a physical presence in a state for that state to compel the seller to collect and remit sales taxes. A substantial nexus with the taxing state is sufficient, which can be established through a significant quantity of economic activity.

Facts:

South Dakota imposes a sales tax on goods and services, which sellers are required to collect and remit.
Due to the physical presence rule established in prior case law, South Dakota was losing an estimated $48 to $58 million in annual tax revenue from remote sellers.
The South Dakota legislature enacted a law requiring remote sellers to collect and remit sales tax if, on an annual basis, they deliver more than $100,000 of goods or services into the state or engage in 200 or more separate transactions for delivery into the state.
Wayfair, Inc., Overstock.com, Inc., and Newegg, Inc. are large online retailers with no employees or real estate in South Dakota.
Each of the companies met the minimum sales or transaction thresholds established by the South Dakota law.
Despite meeting the thresholds, none of the companies collected South Dakota's sales tax, citing the physical presence rule.

Procedural Posture:

South Dakota filed a declaratory judgment action against Wayfair, Inc., Overstock.com, Inc., and Newegg, Inc. in a South Dakota state trial court.
The defendant companies moved for summary judgment, arguing the South Dakota law was unconstitutional under the controlling precedent of Quill.
The state trial court granted summary judgment in favor of the companies.
South Dakota, as the appellant, appealed the decision to the Supreme Court of South Dakota.
The Supreme Court of South Dakota affirmed the trial court's ruling, stating it was bound by the U.S. Supreme Court's precedent in Quill.
South Dakota petitioned the U.S. Supreme Court for a writ of certiorari, which was granted.

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Issue:

Does the Dormant Commerce Clause prohibit a state from requiring an out-of-state seller that has no physical presence in the state to collect and remit sales tax on goods sold to residents of that state?

Opinions:

Majority - Justice Kennedy

No, the Dormant Commerce Clause does not prohibit a state from requiring an out-of-state seller with no physical presence to collect and remit sales tax. The physical presence rule of Quill Corp. v. North Dakota and National Bellas Hess, Inc. v. Department of Revenue of Ill. is unsound and incorrect, and those decisions are overruled. The Court reasoned that the physical presence rule is an artificial, formalistic standard that is not a necessary interpretation of the 'substantial nexus' requirement from Complete Auto. It creates market distortions by giving remote sellers an unfair competitive advantage over brick-and-mortar businesses. Furthermore, the dramatic growth of e-commerce has made the rule's harms more egregious and has removed it from modern economic reality, where a business can have a substantial virtual presence without a physical one. Stare decisis does not justify retaining a rule that is a judicially created imposition on the sovereign authority of states to collect lawful taxes.

Concurring - Justice Thomas

Justice Thomas agreed with overturning Quill and Bellas Hess. He wrote separately to state that he should have joined Justice White's dissent in Quill and that a quarter-century of experience has convinced him the physical presence rule cannot be rationally justified. He further expressed his view that the Court's entire negative Commerce Clause jurisprudence is suspect and should be reconsidered.

Concurring - Justice Gorsuch

Justice Gorsuch agreed with overturning Quill and Bellas Hess. He argued that the prior precedents created a judicially enforced, discriminatory tax break for out-of-state sellers at the expense of local businesses. While agreeing with the outcome, he noted that the historical and constitutional justifications for the dormant Commerce Clause doctrine itself are questionable and are questions for another day.

Dissenting - Chief Justice Roberts

No, the Court should not have overturned the physical presence rule. While acknowledging that Bellas Hess was wrongly decided, the dissent argued that principles of stare decisis should prevail. The majority's decision disrupts a significant part of the national economy that has developed in reliance on the established rule. Congress, not the Court, is the proper body to address this complex issue of economic policy, as it can weigh competing interests and craft a more nuanced solution. The Court's abrupt change in the rules preempts ongoing legislative efforts and may impose significant compliance burdens on small businesses.

Analysis:

This decision fundamentally altered the legal landscape for e-commerce and state taxation by eliminating the long-standing physical presence requirement for sales tax collection. By establishing that 'economic nexus' is sufficient, the Court opened the door for states to tax online sales from remote sellers, potentially generating billions in new revenue. The ruling shifts the legal analysis from a formalistic physical presence test to a more functional one focused on the extent of a business's economic connection to a state. This precedent will continue to shape state tax laws and impact the operations of online businesses, especially small and mid-sized sellers, for years to come.

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