Background – South Dakota’s Remote Sales Tax Case

South Dakota recently enacted Senate Bill 106 (“SB 106”), requiring all retailers with annual in-state sales exceeding $100,000, or 200 separate transactions within the state in a year, to collect and remit sales tax, even if the retailer does not have a physical presence in the state. As stated in the “Legislative Findings” of SB 106, the statute was designed to directly challenge the physical presence standard set forth in the 1992 US Supreme Court decision, Quill v. North Dakota, 504 U.S. 298. In Quill, the US Supreme Court affirmed the physical presence standard, prohibiting states from imposing sales and use tax collection obligations on out-of-state retailers that lack physical presence within the state. To compel compliance with SB 106, the South Dakota Department of Revenue (the “Department” or “State”) sued four online retailers including Wayfair Inc., Newegg Inc., Inc., and Systemax Inc. South Dakota v. Wayfair, Inc. et al., D.S.D. No. 3-16-CV-03019-RAL (“Wayfair“). Systemax has since dropped out of the lawsuit and registered with the state to collect sales tax.

The State has freely admitted in court filings that its newly enacted remote sales tax statute is facially unconstitutional under Quill. The State’s objective is to advance Wayfair to the US Supreme Court in order to overturn Quill’s physical presence standard. Other states, such as Alabama and Tennessee, frustrated by Congress’s failure to pass federal remote sales tax legislation, have joined the “kill Quill” movement and have enacted measures that target remote sales using an economic nexus standard similar to South Dakota’s. The end-goal of these remote nexus laws is to facilitate review of Quill by the US Supreme Court.

Current Status – Jurisdictional Question

Off the State’s carefully constructed path the US Supreme Court, Wayfair is currently caught up in a jurisdictional question; specifically, a federal judge must determine whether Wayfair should proceed in federal court or be remanded to state court. The Department originally initiated the lawsuit in state court; however, the defendant-online retailers had the case removed to federal court on the basis of federal question jurisdiction pursuant to 28 U.S.C. § 1331. Subsequently, the Department filed a motion for remand and the defendants have opposed the motion. The federal court is currently considering whether federal or state court has proper jurisdiction to hear and decide the case.

For several unique reasons the Department is determined to have Wayfair remanded to state court. Beyond the Department’s legal arguments contesting federal jurisdiction, the Department would prefer to have this case litigated through the state court system because SB 106 specifically provides for fast-track litigation to the state supreme court, a perk the Department does not want to lose. Moreover, in its brief supporting remand, the State conveyed serious concern that a jurisdictional blunder at this stage in the litigation (i.e. a misplaced assertion of original federal jurisdiction) could prevent the case from later advancing to review on the merits by the US Supreme Court; thereby, frustrating the State’s entire purpose in enacting SB 106 and initiating Wayfair.

Opposing remand, the defendants’ brief emphasizes that federal question jurisdiction is proper because Wayfair presents a single issue of federal constitutional law – Quill’s physical presence standard. Specifically, the defendants assert that the case should proceed in federal court because it is a “one-of-a-kind” litigation designed by the State to reverse existing federal law and usurp Congress’s traditional legislative role. Further, the defendants contend that the Tax Injunction Act (“TIA”) does not prevent the federal court from exercising jurisdiction in this case. The TIA provides that federal courts “shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.” 28 U.S.C. § 1341. Thus, the TIA requires most state tax controversies be pursued in state court. However, the defendants assert that the TIA plainly does not apply to a state tax enforcement suit, like Wayfair.


Apart from South Dakota’s immediate concerns regarding this case proceeding in federal court, there could be more far reaching consequences depending on the outcome of this jurisdictional question. Generally, taxpayers would prefer to have a federal court adjudicate a state tax controversy in order to receive more impartial treatment, among other reasons. However, the TIA has long stood as a strong barrier to federal review of most state tax disputes – and states have been happy to have the home court advantage (i.e. state court) when litigating state tax cases.

A ruling for the defendants, allowing Wayfair to proceed in the federal court system, would arguably narrow the scope of the TIA and, potentially, afford litigants of state tax controversies a potential path into federal court. Such outcome would be in line with other cases such as Direct Marketing Association v. Brohl, 135 S. Ct. 1124 (2015), where the US Supreme Court unanimously held that the TIA does not bar federal review of a case involving state tax notice and reporting requirements.

The reasoning behind a court’s decision to award federal jurisdiction in this matter will be equally as important. If the court determines that there is proper federal question jurisdiction because the case hinges on Quill’s physical presence standard, then, arguably, other state tax disputes that turn on a unique federal interest could potentially be heard in federal court. Ultimately, the outcome of this jurisdictional question could alter the balance between state and federal adjudication of certain state tax controversies – a result that was surely not part of South Dakota’s master plan to “kill Quill.