On March 6, 2017, the South Dakota Sixth Judicial Circuit ruled a state law unconstitutional that would have required remote retailers to collect and remit sales tax if they exceed a statutory threshold of sales into the state each year. The case, South Dakota v. Wayfair, Inc., potentially brings the decades-long debate on taxing remote sales a step closer to returning to the U.S. Supreme Court. When South Dakota passed the law in early 2016, it became the first state to implement a remote sales tax law, which was challenged almost immediately. Several states have since followed in efforts to adopt similar legislation, all in response to the lack of action by the U.S. Congress to enact remote sales tax legislatio.
Because lower courts must follow U.S. Supreme Court precedent, the decision was not unexpected. The South Dakota court was simply following the Court’s decision in Quill v. North Dakota (1992), which held that states could not require retailers without any in-state physical presence to collect sales tax. The South Dakota legislature drafted the law to specifically and directly challenge that standard. Since the 1992 decision, the Internet has substantially changed the retail marketplace. Billions of sales occur over the Internet every year as more and more customers opt to shop online rather than in traditional brick-and-mortar stores. Due to this evolution of the retail marketplace, the applicability of the standard established in Quill has been questioned more frequently in recent years. Most notably, in the 2015 U.S. Supreme Court case Direct Marketing Association v. Brohl, Justice Kennedy criticized Quill, acknowledging that times have changed since then and stating that the justice system “should find an appropriate case for this Court to reexamine Quill.”
The state is now expected to appeal the decision to the South Dakota Supreme Court. And just as the lower court was bound to follow the Supreme Court’s precedent, South Dakota’s highest court will do the same. Upon that result, it will then be up to the U.S. Supreme Court to decide whether it wants to review the case, potentially opening the door to overturn Quill.