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United States Supreme Court to Decide Internet Sales Tax Case

Tax Alert | May 24, 2018
By: John Eagan

The United States Supreme Court will soon decide a significant sales tax case that is expected to have broad implications for internet businesses. The Supreme Court recently heard oral argument in South Dakota v. Wayfair Inc., et al. and the Court is being asked to decide whether South Dakota can impose a sales tax collection obligation on a “remote seller” or whether the in-state physical presence requirement from its 1992 decision in Quill Corporation v. North Dakota, 504 U.S. 298 (1992), should continue to apply to internet sales.


In May 2016, South Dakota revised its sales tax law to require certain “remote sellers” to collect sales tax when selling tangible personal property, electronically transferring products, or providing services for delivery into South Dakota, even if the seller does not have a physical presence in the state. In order for the law to apply, the seller must meet, in the current calendar year or the previous calendar year, either of the following criteria: (1) the seller’s gross revenue from the sale of tangible personal property, product transferred electronically, or services delivered into South Dakota exceeds $100,000; or (2) such sales, electronic product transfers or services delivered into South Dakota involve 200 or more separate transactions. In anticipation of legal challenges, the law stated that it would not be applied retroactively and it contemplated that South Dakota would bring a declaratory judgment action to determine the legality of the new law under state and federal law.  Pending a decision on the declaratory judgment action, the law imposed a prohibition against South Dakota enforcing the new sales tax law.

Commerce Clause

As noted above, the central issue in the case is whether a physical presence is required before the state can impose a sales tax on products sold or services provided in the state. This issue was addressed by the Supreme Court in National Bellas Hess v. Department of Revenue, 386 U.S. 753 (1967), where the Supreme Court held that the Commerce Clause prohibited a state from imposing the obligation to collect use tax upon a seller whose only connection with customers in the state is advertising flyers mailed to customers or the sale of products shipped by common carrier or mail. The Supreme Court upheld the National Bellas Hess decision in Quill, even though the Supreme Court in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1997), unanimously held that a Mississippi tax imposed on the privilege of doing business in Mississippi did not violate the Commerce Clause when it is applied to interstate activity as long as there was a substantial nexus to the state and the tax is fairly apportioned, does not discriminate against interstate commerce and is fairly related to the services provided by the state.

In Quill, the Supreme Court acknowledged that cases involving taxes other than sales and use taxes had not adopted a “similar bright line, physical presence requirement” that was established in National Bellas Hess, but instead applied the principles of stare decisis to confirm that “the Bellas Hess rule” was still applicable law. The Supreme Court placed great weight on the fact that Congress, in the 25 years since the National Bellas Hess decision, had not adopted legislation to “overrule” the Bellas Hess rule, even though Congress was “free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes.”

South Dakota Litigation

South Dakota, like many states, sees the imposition of a sales tax collection obligation on internet sales as a way to raise revenues. South Dakota does not have a state income tax, so much of its revenue comes from sales and use taxes. The 2016 sales tax legislation was clearly an attempt by South Dakota to have the Supreme Court reexamine the National Bellas Hess and Quill decisions.

Both the South Dakota Circuit Court and the South Dakota Supreme Court held that the 2016 sales tax legislation was inconsistent with the Supreme Court’s Commerce Clause decisions and held that the legislation was unconstitutional. South Dakota filed a petition for writ of certiorari with the Supreme Court to review the judgment of the South Dakota Supreme Court and it agreed to hear the case.

Oral Argument 

Oral argument in the case was heard on April 17, 2018, with appearances by the parties as well as by the Office of the Solicitor General as amicus curiae in support of the position taken by South Dakota. Several themes emerged during the questioning.

The Supreme Court was concerned about a variety of mechanics issues if the Quill decision was overturned, such as retroactivity implications, the required level of physical or economic contacts, compliance costs imposed on businesses, and the impact of the compliance costs on the profitability of small businesses. The Supreme Court also questioned whether the fix to the sales tax issues really resides with Congress and noted that Congress had not chosen to address the issue in the 26 years since the Quill decision.


The questions raised in oral argument track the same concerns the Supreme Court addressed in the Quill decision, namely, whether the “continuing value of a bright line rule” and the “doctrine and principles of stare decisis” indicate that current law should be maintained. The Supreme Court also stated in the Quill decision that its decision was made easier by the fact that the underlying issue was one that Congress may be better qualified to resolve. It appears that the Supreme Court will need to decide whether the benefits of certainty created by the Quill decision outweigh the clear loss of state sales and use tax revenues and enhanced burdens on small retailers. 

There is also a bit of irony in the case, because the conventional wisdom about internet sellers and local “brick and mortar” businesses is that the internet sellers have a competitive advantage since they do not collect any sales tax. At oral argument, the attorney for the defendants made several interesting observations with respect to this point. First, he stated that 19 of the 20 largest internet retailers already collect sales tax because the nature of the market has required them to establish a local presence. Second, he stated that among the top 100 internet retailers, the collection rate is between 86% and 97%. Finally, he observed that the issue is not really between small in-state retailers and out-of-state direct marketers. Instead, the real competition is between the large companies, who are multi-channel merchants dominating the internet sales, and everyone else.

The Supreme Court may be struggling with the likely negative economic impact that a repeal of Quill will have on small internet businesses, not on large internet retailers, and whether potential taxation by state and local governments (estimated in excess of 10,000 taxing jurisdictions that could impose sales tax) violates the Commerce Clause if there is no physical presence requirement. The Supreme Court is also concerned that the solution really should be addressed by Congress. A decision should be released by the end of June and it will shape (or reshape) the sales tax landscape to a very significant extent.

If you have questions or would like further information, contact John Eagan (; 212.868.4835) or another member of our Tax and Estates Group.

This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
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