584 U.S. __, 138 S. Ct. 2080 (2018)
South Dakota taxes the retail sales of goods and services in the State.1 Sellers are required to collect and remit the tax to the State, but if they do not then in-state consumers are responsible for paying a use tax at the same rate.2 Under prior decisions, South Dakota may not require a business that has no physical presence in the State to collect its sales tax.3 Consumer compliance rates are notoriously low, and it is estimated that those decisions cause South Dakota to lose between $48 and $58 million annually.4
Concerned about the erosion of its sales tax base and corresponding loss of critical funding for state and local services, the South Dakota Legislature enacted a law requiring out-of-state sellers to collect and remit sales tax as if the seller had a physical presence in the State.5 The Act covers only sellers that, on an annual basis, deliver more than $100,000 of goods or services into the State or engage in 200 or more separate transactions for the delivery of goods or services into the State.6
Respondents Wayfair, Inc., Overstock.com, Inc., and Newegg, Inc. are merchants with no employees or real estate in South Dakota.7 Wayfair, Inc. is a leading online retailer of home goods and furniture and had net revenues of over $4.7 billion last year.8 Overstock.com, Inc. is one of the top online retailers in the United States and had net revenues of over $1.7 billion last year.9 Newegg, Inc. is a major online retailer of consumer electronics in the United States.10 Each of these three companies ships its goods directly to purchasers throughout the United States, including South Dakota.11 Each easily meets the minimum sales or transactions requirement of the Act, but none collects South Dakota sales tax.12
Pursuant to the Act’s provisions for expeditious judicial review, South Dakota filed a declaratory judgment action against respondents in state court, seeking a declaration that the requirements of the Act are valid and applicable to respondents and an injunction requiring respondents to register for licenses to collect and remit the sales tax. Respondents moved for summary judgment, arguing that the Act is unconstitutional.13 The trial court granted their motion.14 The South Dakota Supreme Court affirmed on the ground that Quill is controlling precedent.15 This Court granted certiorari.16 The case was argued on April 17, 2018, and decided on June 21, 2018.17
Whether the physical-presence rule of Quill Corp. v. North Dakota and National Bellas Hess, Inc. v. Department of Revenue of Illinois should be overruled?18
The Commerce Clause permits a State to require an out-of-state seller to collect and remit sales tax when the seller avails itself of the substantial privilege of carrying on business in the State through economic or virtual contacts that establish a substantial nexus.19 Physical presence in the State is not required.20
Yes. The physical-presence rule announced in Quill and Bellas Hess is unsound and incorrect because it is not a necessary interpretation of the substantial nexus requirement under Complete Auto Transit, Inc. v. Brady.21 It creates market distortions by granting remote sellers a competitive advantage.22 It imposes an arbitrary formalistic distinction disavowed by modern Commerce Clause precedents.23
Applying the rule to the established facts, South Dakota enacted S.B. 106 requiring collection only from sellers delivering more than $100,000 of goods or services or engaging in 200 or more transactions annually into the State.24 Respondents Wayfair, Overstock, and Newegg each meet those thresholds while shipping goods directly to South Dakota purchasers yet maintain no employees or real estate there.25 These economic contacts satisfy substantial nexus without physical presence.26 The rule has become further removed from economic reality with the rise of e-commerce, as evidenced by the estimated annual revenue loss of $48 to $58 million to South Dakota alone.27
Stare decisis does not compel its retention given its unworkability and the changed interstate marketplace since 1992.28
The physical-presence rule is overruled because it is an incorrect interpretation of the Commerce Clause that no longer aligns with contemporary economic realities or the substantial nexus standard.29
Related opinions on this issue
Justice Thomas joined the opinion of the Court.30 He explained that he should have joined Justice White's dissent in Quill twenty-five years earlier.31 A quarter century of experience has convinced him that Bellas Hess and Quill can no longer be rationally justified.32
The Commerce Clause does not require physical presence for a State to impose tax-collection duties on out-of-state sellers.33 Stare decisis does not require retention of this erroneous precedent.34 He also expressed broader disagreement with the Court's negative Commerce Clause jurisprudence.35
Justice Gorsuch joined the opinion of the Court.36 He noted that the physical-presence rule has enforced a judicially created tax break for out-of-state Internet and mail-order firms at the expense of in-state brick-and-mortar rivals.37 This result has no basis in the text of the Commerce Clause.38
While stare decisis is important, it is not absolute when a precedent has proven unworkable and created economic distortions.39 The time has come to overrule Quill.40 He agreed that the paradox of condemning interstate discrimination while promoting it should end.41
Joined by Breyer, Sotomayor, And Kagan, Jj.
Chief Justice Roberts dissented and would decline to overrule Quill.42 E-commerce has grown into a significant and vibrant part of the national economy against the backdrop of the physical-presence rule.43 Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress rather than the Court.44
The heightened form of stare decisis in the dormant Commerce Clause context counsels leaving the matter to the branch with plenary power to regulate interstate commerce.45 Congress is better positioned to consider competing interests such as compliance costs for small businesses and to address the potential dampening effect on e-commerce opportunities across new markets.46 Legislators may more directly consider the competing interests at stake than the Judiciary.47
Whether South Dakota may require out-of-state sellers that deliver more than $100,000 of goods or services into the State or engage in 200 or more separate transactions annually to collect and remit sales tax?48
Under the first prong of the Complete Auto test, a state tax is valid if it applies to an activity with a substantial nexus to the taxing State.49 Such a nexus is established when the taxpayer avails itself of the substantial privilege of carrying on business in that jurisdiction through economic or virtual contacts.50
Yes. In the absence of the overruled physical-presence rule, the South Dakota Act satisfies the substantial nexus requirement because it applies only to sellers that deliver more than $100,000 of goods or services into the State or engage in 200 or more separate transactions annually.51 A quantity of business that could not occur unless the seller availed itself of the substantial privilege of carrying on business there.52 Applying this standard to the established facts, respondents Wayfair, Overstock, and Newegg are large national companies that each meet the Act's minimum thresholds.53
They ship goods directly to South Dakota purchasers and maintain an extensive virtual presence, thereby establishing the required nexus.54 The Act is not discriminatory, is fairly apportioned, and is fairly related to the services the State provides.55 Any remaining claims regarding undue burdens may be addressed on remand.56 The Act includes features such as a safe harbor, no retroactive application, and participation in the Streamlined Sales and Use Tax Agreement that appear designed to prevent discrimination or undue burdens on interstate commerce.57
South Dakota may require the out-of-state sellers to collect and remit sales tax because the Act establishes a substantial nexus through economic and virtual contacts that satisfy the Complete Auto test.58
Related opinions on this issue
Joined by Breyer, Sotomayor, And Kagan, Jj.
Chief Justice Roberts dissented from the judgment and would have left the physical-presence rule in place.59 He argued that the Court should not act on this important question of current economic policy, solely to expiate a mistake it made over 50 years ago.60 E-commerce has grown into a significant and vibrant part of the national economy against the backdrop of the physical-presence rule. Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress.
The heightened form of stare decisis in the dormant Commerce Clause context counsels leaving the matter to the branch with plenary power to regulate interstate commerce. Congress is better positioned to consider competing interests such as compliance costs for small businesses and to address the potential dampening effect on e-commerce opportunities across new markets. Legislators may more directly consider the competing interests at stake than the Judiciary.