State v. Wayfair Inc.

#28160-a-GAS
2017 S.D. 56IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
* * * *
STATE OF SOUTH DAKOTA, Plaintiff and Appellant,
v.
WAYFAIR INC.,
OVERSTOCK.COM, INC.,
and NEWEGG INC., Defendants and Appellees.
* * * *
APPEAL FROM THE CIRCUIT COURT OF
THE SIXTH JUDICIAL CIRCUIT
HUGHES COUNTY, SOUTH DAKOTA
* * * *
THE HONORABLE MARK W. BARNETT
Judge
* * * *
MARTY J. JACKLEY
Attorney General
RICHARD M. WILLIAMS
Deputy Attorney General
KIRSTEN E. JASPER
Assistant Attorney General
Pierre, South Dakota
ANDREW L. FERGEL
Chief Legal Counsel
Department of Revenue
Pierre, South Dakota
ARGUED AUGUST 29, 2017
OPINION FILED 09/13/17
RONALD A. PARSONS, JR. of
Johnson, Janklow, Abdallah,
Reiter & Parsons, LLP
Sioux Falls, South Dakota
ERIC F. CITRON of
Goldstein & Russell, PC
Bethesda, Maryland Attorneys for plaintiff
and appellant.
GEORGE S. ISAACSON
MARTIN I. EISENSTEIN
MATTHEW P. SCHAEFER of
Brann & Isaacson
Lewiston, Maine
JEFF BRATKIEWICZ
KATHRYN J. HOSKINS of
Bangs, McCullen, Butler, Foye & Simmons, LLP
Sioux Falls, South Dakota Attorneys for defendants
and appellees.
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SEVERSON, Justice
[¶1.] South Dakota has no state income tax and relies on retail sales and
use taxes for much of its revenue. Pursuant to state statute, sales tax is generally
collected by sellers selling merchandise in this state at the point of sale and is
remitted to the state by those sellers. SDCL 10-45-27.3. 1 Decisions from the
United States Supreme Court interpreting the Commerce Clause of the United
States Constitution prohibit the State of South Dakota from imposing this collection
obligation on sellers with no physical presence in the state. As Internet sales by
these sellers have risen, state revenues have decreased. Faced with declining
revenues, the 2016 South Dakota Legislature passed legislation extending the
obligation to collect and remit sales tax to sellers with no physical presence in the
state. S.B. 106, 2016 Legis. Assemb., 91st Sess. § 1 (S.D. 2016). 2 The Legislature
specifically passed the legislation to challenge the Supreme Court’s Commerce
Clause decisions. Id. § 8. Pursuant to the legislation, the State of South Dakota
commenced a declaratory judgment action in circuit court seeking a declaration that
1. SDCL 10-45-27.3 provides in relevant part:
Any person who holds a license issued pursuant to this
chapter or who is a person whose receipts are subject to
the tax imposed by this chapter shall, except as otherwise
provided in this section, file a return, and pay any tax
due, to the Department of Revenue on or before the
twentieth day of the month following each monthly
period. The return shall be filed on forms prescribed and
furnished by the department.
2. A complete copy of the certified bill, S.B. 106, is attached to this
decision as Appendix 1.
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certain Internet sellers (Sellers) 3 with no physical presence in the state must
comply with the requirements of the 2016 legislation. Id. § 2. Sellers moved for
summary judgment. Adhering to Supreme Court precedent, the circuit court
granted the motion, entered judgment for Sellers, and enjoined the State from
enforcing the 2016 legislation. The State appeals. We affirm.
Facts and Procedural History
[¶2.] Generally, sellers selling merchandise in South Dakota have an
obligation to collect and remit sales tax on each transaction to the Department of
Revenue. SDCL 10-45-27.3. However, the applicability of this requirement to
sellers with no physical presence in a state has been limited by the Supreme Court’s
interpretations of the Commerce Clause since at least 1967. The Commerce Clause
generally grants “exclusive authority [to] Congress to regulate trade between the
States[.]” Nat’l Bellas Hess, Inc. v. Dep’t of Rev. of the St. of Ill., 386 U. S. 753, 756,
87 S. Ct. 1389, 1391, 18 L. Ed. 2d 505 (1967). 4 In 1967, the Supreme Court held
that the Commerce Clause prohibited Illinois from requiring a mail order seller in
3. Wayfair Inc., Overstock.com, Inc., and Newegg Inc.
4. The Commerce Clause provides in full:
The Congress shall have Power
***
3. To regulate Commerce with foreign Nations, and
among the several States, and with the Indian
Tribes[.]
U.S. Const. art. I, § 8, cl. 3.
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Missouri to collect and remit use tax 5 to Illinois for merchandise sold and shipped
into that state. The seller had no physical presence in Illinois, and its only contacts
with that state were by mail or common carrier. 6 The Court reasoned that exposing
5. Sales and use tax are often complementary. In the recent case Direct
Marketing Association v. Brohl, __ U.S. __, 135 S. Ct. 1124, 1127, 191 L. Ed.
2d 97 (2015), Justice Thomas explained:
Like many States, Colorado has a complementary sales-
and-use tax regime. Colorado imposes both a 2.9 percent
tax on the sale of tangible personal property within the
State and an equivalent use tax for any property stored,
used, or consumed in Colorado on which a sales tax was
not paid to a retailer.
(Internal citations omitted.)
South Dakota uses a similar system. SDCL 10-46-2 (imposing an excise tax
equal to the sales tax on the use of tangible personal property in the State).
6. The seller’s lack of a “physical presence” in Illinois was explained with
reference to the following factors:
[Seller] does not maintain in Illinois any
office, distribution house, sales house,
warehouse or any other place of business; it
does not have in Illinois any agent,
salesman, canvasser, solicitor or other type
of representative to sell or take orders, to
deliver merchandise, to accept payments, or
to service merchandise it sells; it does not
own any tangible property, real or personal,
in Illinois; it has no telephone listing in
Illinois and it has not advertised its
merchandise for sale in newspapers, on
billboards, or by radio or television in
Illinois.
All of the contacts which [Seller] does have with the State
are via the United States mail or common carrier. Twice
a year catalogues are mailed to the company’s active or
(continued . . . )
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the seller’s interstate business to local “variations in rates of tax . . . and record-
keeping requirements” would violate the purpose of the Commerce Clause “to
ensure a national economy free from . . . unjustifiable local entanglements.” Id. at
759-60, 87 S. Ct. at 1393. The Court concluded that “[u]nder the Constitution, this
[was] a domain where Congress alone [had] the power of regulation and control.”
Id. 7
(. . . continued)
recent customers throughout the Nation, including
Illinois. This mailing is supplemented by advertising
‘flyers’ which are occasionally mailed to past and potential
customers. Orders for merchandise are mailed by the
customers to [Seller] and are accepted at its Missouri
plant. The ordered goods are then sent to the customers
either by mail or by common carrier.
Bellas Hess, 386 U.S. at 754, 87 S. Ct. at 1390 (quoting Dep’t of Rev. v. Nat’l
Bellas Hess, Inc., 214 N.E.2d 755, 757 (Ill. 1966)).
7. Bellas Hess was a product of what the Supreme Court refers to as “the
‘negative’ or ‘dormant’ Commerce Clause[.]” Quill Corp. v. North Dakota, 504
U.S. 298, 309, 112 S. Ct. 1904, 1911, 119 L. Ed. 2d 91 (1992) (quoting P.
Hartman, Federal Limitations on State and Local Taxation §§ 2:9—2:17
(1981)). Although the Commerce Clause provides a “positive grant of power
to Congress,” it carries a negative component “prohibiting States from . . .
imposing excessive burdens on interstate commerce without congressional
approval[.]” Comptroller of the Treas. of Md. v. Wynne, __ U.S. __, __, 135 S.
Ct. 1787, 1794, 191 L. Ed. 2d 813 (2015). This prohibition exists because “one
of the chief evils that led to the adoption of the Constitution [was] . . . state
tariffs and other laws that burdened interstate commerce.” Id. Thus, the
Supreme Court interprets the negative or dormant Commerce Clause as
precluding states from imposing taxes “which discriminate[ ] against
interstate commerce . . . by providing a direct commercial advantage to local
business, or by subjecting interstate commerce to the burden of ‘multiple
taxation.’” Id. (quoting Nw. States Portland Cement Co. v. Minn., 358 U. S.
450, 458, 79 S. Ct. 357, 362, 3 L. Ed. 2d 421 (1959)).
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[¶3.] In 1992, the Supreme Court, while limiting application of its due
process analysis, reaffirmed Bellas Hess’s Commerce Clause limitations in Quill
Corp. v. North Dakota, 504 U.S. 298, 112 S. Ct. 1904, 119 L. Ed. 2d 91 (1992). In
that case, the Court held that a mail-order house with no physical presence in
North Dakota could not be required to collect and remit use tax to that state for
“property purchased for storage, use, or consumption within the State.” Id. at 302,
112 S. Ct. at 1908. Despite later developments in its Commerce Clause
jurisprudence, the Court adhered to the “bright-line rule” of Bellas Hess on the
basis that it “encourage[d] settled expectations and . . . foster[ed] investment by
businesses and individuals.” Id. at 316, 112 S. Ct. at 1915.
[¶4.] In 2015, the Supreme Court reviewed a Colorado law that instead of
imposing the obligation to collect and remit use tax on sellers with no physical
presence in that state, imposed the obligation “to notify . . . customers of their use-
tax liability and to report” sales information back to the state. Direct Marketing, __
U.S. at __, 135 S. Ct. at 1127. The issue before the Supreme Court was whether the
United States District Court had jurisdiction under the Tax Injunction Act (28
U.S.C. § 1341) over a suit challenging the new law on Commerce Clause grounds.
Justice Kennedy, however, took the opportunity to write a concurrence questioning
the advisability of continuing to follow Bellas Hess and Quill in light of later
Commerce Clause jurisprudence and “in view of the dramatic technological and
social changes that [have] taken place in our increasingly interconnected economy.”
Id. at __, 135 S. Ct. at 1135 (Kennedy, J., concurring). Despite noting the “startling
revenue shortfall in many States” due to Bellas Hess and Quill, Justice Kennedy
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observed that Direct Marketing did not raise reconsideration of those decisions “in a
manner appropriate for the Court to address it.” Id. Nevertheless, he concluded
that Direct Marketing provided “the means to note the importance of reconsidering
doubtful authority.” Id. He invited “[t]he legal system [to] find an appropriate case
for [the Supreme] Court to reexamine Quill and Bellas Hess.” Id.
[¶5.] With this legal backdrop, the South Dakota Legislature began its 2016
session concerned with its ability to maintain state revenue in the face of increasing
Internet sales and their effect on sales tax collections. 8 Senate Bill 106 was
introduced during the session as: “An Act to provide for the collection of sales taxes
from certain remote sellers, to establish certain Legislative findings, and to declare
an emergency.” S.B. 106, 2016 Legis. Assemb., 91st Sess. (S.D. 2016). The Act
provided that any sellers of “tangible personal property” in South Dakota without a
“physical presence in the state . . . shall remit” sales tax according to the same
procedures as sellers with “a physical presence[.]” Id. § 1. However, the Act limited
this obligation to sellers with “gross revenue” from sales in South Dakota of over
$100,000 per calendar year or with 200 or more “separate transactions” in the state
within the same time frame. Id. §§ 1-2. The Act authorized the State to bring a
declaratory judgment action in circuit court against any person believed to meet the
Act’s criteria “to establish that the obligation to remit sales tax is applicable and
valid under state and federal law.” Id. § 2. The Act further authorized a motion to
dismiss or a motion for summary judgment in the action. Id. It also provided that
8. South Dakota must maintain a balanced budget. See S.D. Const. art. XII, §
7.
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the filing of the action “operates as an injunction during the pendency of the” suit
prohibiting the State from enforcing the Act’s obligations. Id. § 3. Other sections of
the Act prohibited retroactive application of the obligation to remit sales tax and
made the obligation prospective only from the date of dissolution or lifting of an
injunction provided for by the Act. Id. §§ 5-6.
[¶6.] In addition to these provisions, the Act contained an emergency clause
declaring it “necessary for the support of the state government” and making it
effective “on the first day of the first month” falling at least fifteen days after
signing by the Governor. Id. § 9. 9 The Act’s emergency clause made a two-thirds
majority vote in both houses of the Legislature necessary for it to pass. S.D. Const.
art. III, § 22.
[¶7.] Senate Bill 106 was introduced in the South Dakota Senate and
referred for a hearing by the Senate State Affairs Committee. S. Journal, 91st
Sess., 150 (S.D. 2016). The hearing was held on February 17, 2016. Id. at 316.
Several witnesses testified in open committee in support of the bill, including a
representative of the Governor’s Office. 10 There was no opposition. Hearing I,
supra note 9. The bill passed out of committee with a do pass recommendation and
9. Most legislation is effective “on the first day of July after its passage[.]”
SDCL 2-14-16.
10. An Act to provide for the collection of sales taxes from certain remote sellers,
to establish certain Legislative findings, and to declare an emergency:
Hearing on S.B. 106 Before the S. Comm. on State Affairs, 2016 Legis.
Assemb., 91st Sess. 2:27 (S.D. 2016),
http://sdlegislature.gov/Legislative_Session/Bills/Bill.aspx?Bill=106&Session
=2016 [Hearing I].
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was debated and considered on the floor of the Senate on February 19, 2016. S.
Journal at 319, 370. The bill passed the Senate on a vote of thirty-three yeas and
zero nays. S. Journal at 370.
[¶8.] The bill had its first reading in the South Dakota House of
Representatives on February 22, 2016, and was referred for a hearing by the House
State Affairs Committee. H. Journal, 91st Sess., 621 (S.D. 2016). The hearing was
held on February 29, 2016. Id. at 710. Once again, several witnesses testified in
open committee in support of the bill. 11 Again, there was no opposition. Hearing II,
supra note 10. The bill passed out of the House committee with a do pass
recommendation. H. Journal at 710. It was debated and considered on the House
floor on March 1, 2016. Id. at 740. The bill passed by a vote of sixty-four yeas and
two nays. Id. The Governor signed the bill on March 22, 2016. S. Journal at 619.
It fulfilled the two-thirds vote requirement for the emergency clause and took effect
on May 1, 2016. Id.; S.B. 106, § 9.
[¶9.] Shortly after the Governor signed Senate Bill 106 into law, the South
Dakota Department of Revenue began issuing written notices to sellers it believed
met the requirements of Senate Bill 106. The notices: informed the sellers of the
passage of the law; explained its requirements; advised the sellers to register for
South Dakota sales tax licenses by a date certain; and warned that the failure to
11. An Act to provide for the collection of sales taxes from certain remote sellers,
to establish certain Legislative findings, and to declare an emergency:
Hearing on S.B. 106 Before the H. Comm. on State Affairs, 2016 Legis.
Assemb., 91st Sess. 1:00 (S.D. 2016),
http://sdlegislature.gov/Legislative_Session/Bills/Bill.aspx?Bill=106&Session
=2016 [Hearing II].
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register could result in a declaratory judgment action as authorized by the law.
Although the three sellers in this appeal, as well as a fourth seller, Systemax Inc.,
received notices, they did not register for sales tax licenses. The State filed a
declaratory judgment action against Sellers in circuit court on April 28, 2016. The
State sought a judicial declaration that the requirements of Senate Bill 106 were
valid and applicable to Sellers, an order enjoining enforcement of the law during the
pendency of the action, and an injunction requiring Sellers to register for licenses to
collect and remit sales tax. 12
[¶10.] Following service of the State’s complaint, Systemax Inc. voluntarily
registered for a sales tax license and immediately began collecting taxes under the
law. Therefore, the State dismissed Systemax from its lawsuit on May 19, 2016.
The remaining sellers then sought to remove the State’s action to the United States
District Court for South Dakota on the basis of federal question jurisdiction. The
District Court rejected removal and remanded the case to the South Dakota circuit
court in January 2017.
[¶11.] After the District Court’s remand, Sellers filed a joint answer, motion
for summary judgment, and statement of material facts admitting: each lacked a
physical presence in South Dakota; each met the sales and transaction
12. Along with its complaint, the State filed a separate application for a
preliminary injunction noting that the law provided for an injunction against
its enforcement during the pendency of a suit under the law. See S.B. 106,
§ 3.
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requirements for application of Senate Bill 106; 13 and none were registered to
collect South Dakota sales tax. As an affirmative defense, Sellers raised the
unconstitutionality of Senate Bill 106 under the Commerce Clause. The State filed
a response to the motion for summary judgement agreeing with Sellers’ statement
of material facts. The State further agreed that the court would have to grant
Sellers’ motion for summary judgment based upon Bellas Hess and Quill and
indicated its intention to pursue review of the issue by the United States Supreme
Court.
[¶12.] The circuit court did not hold a hearing. It entered its decision based
on undisputed statements of material fact and the parties’ briefs. As part of its
decision, the court noted that the parties agreed that no hearing was necessary.
The court found no material issue of fact in dispute over Sellers’ lack of a physical
presence in South Dakota. Observing its obligation to adhere to Supreme Court
precedent prohibiting the imposition of an obligation to collect and remit sales tax
on sellers with no physical presence in the State, the court granted Sellers’ motion
for summary judgment. It enjoined the State from enforcing the obligation to collect
and remit sales tax against Sellers. The State filed a timely notice of appeal of the
court’s order granting summary judgment.
13. Sales of personal property for delivery into South Dakota exceeding $100,000
and 200 or more separate transaction in the previous calendar year. See S.B.
106, § 1.
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Issue
Whether the circuit court erred in granting summary judgment to Sellers.
Standard of Review
[¶13.] We review a summary judgment de novo. Heitmann v. Am. Fam. Mut.
Ins. Co., 2016 S.D. 51, ¶ 8, 883 N.W.2d 506, 508 (citing Ass Kickin Ranch, LLC v. N.
Star Mut. Ins. Co., 2012 S.D. 73, ¶ 7, 822 N.W.2d 724, 726). We determine whether
there are any “genuine issues of material fact” in the case and “whether the law was
correctly applied.” Id. (quoting Ass Kickin Ranch, 2012 S.D. 73, ¶ 6, 822 N.W.2d at
726). If there are no genuine issues of material fact, “our ‘review is limited to
determining whether the [circuit] court correctly applied the law.’” Id.
Analysis and Decision
[¶14.] Sellers argue that there is an inadequate record for this Court’s review
in this matter. But Sellers moved for summary judgment and by doing so, limited
the record available for review. See SDCL 15-6-56(c) (limiting the record on a
motion for summary judgment to “the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, if any[.]”). In
any event, the material facts are not in dispute. The parties agreed that each seller
had a principal place of business outside of South Dakota and each lacked a
physical presence in this state. The parties agreed that in the previous calendar
year, each seller had gross revenue from the sale of tangible personal property in
South Dakota in excess of $100,000 and/or sold tangible personal property in the
state in 200 or more separate transactions. The parties agreed that none of the
sellers were registered to collect South Dakota sales tax.
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[¶15.] In view of these undisputed facts and the Supreme Court’s holdings in
Bellas Hess and Quill, Senate Bill 106 could not impose a valid obligation on Sellers
to collect and remit sales tax to this State because none of them had a physical
presence in the state. See Bellas Hess, 386 U.S. at 758-60, 87 S. Ct. at 1392-93(rejecting imposition of “the duty of use tax collection and payment upon a seller”
with no physical presence in the taxing state); Quill, 504 U.S. at 317-18, 112 S. Ct.
at 1916 (reaffirming Bellas Hess’s Commerce Clause limitations in rejecting a
state’s attempt to require a seller with no physical presence in the state to collect
and pay use tax for goods sold in the state). We see no distinction between the
collection obligations invalidated in Quill and those imposed by Senate Bill 106, and
hold that the circuit court correctly applied the law when it granted Sellers’ motion
for summary judgment.
[¶16.] Nonetheless, the State argues that the Supreme Court should
reconsider Bellas Hess and Quill. It claims that in bringing this suit, the State has
accepted Justice Kennedy’s invitation in Direct Marketing for “[t]he legal system
[to] find an appropriate case for [the Supreme] Court to reexamine” those decisions.
__ U.S. at __, 135 S. Ct. at 1135 (Kennedy, J., concurring). According to the State,
circumstances have changed since Bellas Hess and Quill, making Bellas Hess and
Quill outdated. The State emphasizes that computer technology and software have
advanced, South Dakota has streamlined its revenue laws, and the retail industry
has evolved. The State also claims that the Supreme Court’s application of the
physical presence requirement to the collection of sales tax differs from its
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application of other Commerce Clause requirements to similar collection
obligations. This has led to inconsistent results.
[¶17.] In his concurrence in Direct Marketing, Justice Kennedy recognized
many of the State’s arguments supporting reconsideration of Bellas Hess and Quill.
See __ U.S. at __, 135 S. Ct. at 1134 (Kennedy, J., concurring). Some of them go as
far back as Justice Fortas’s original dissent in Bellas Hess and Justice White’s
concurrence and dissent in Quill. See 386 U.S. at 760, 87 S. Ct. at 1393 (Fortas, J.,
dissenting); 504 U.S. at 321, 112 S. Ct. at 1916 (White, J., concurring in part and
dissenting in part). Before joining the Supreme Court, Justice Gorsuch, while
acknowledging Supreme Court precedent binding on lower courts, also raised
similar concerns with Bellas Hess and Quill. See Direct Mktg. Ass’n v. Brohl, 814
F.3d 1129, 1147 (10th Cir. 2016) (Gorsuch, Circuit Judge, concurring).
[¶18.] However persuasive the State’s arguments on the merits of revisiting
the issue, Quill has not been overruled. Quill remains the controlling precedent on
the issue of Commerce Clause limitations on interstate collection of sales and use
taxes. We are mindful of the Supreme Court’s directive to follow its precedent when
it “has direct application in a case” and to leave to that Court “the prerogative of
overruling its own decisions.” Rodriguez de Quijas v. Shearson/American Exp., Inc.,
490 U.S. 477, 484, 109 S. Ct. 1917, 1921-22, 104 L. Ed. 2d 526 (1989). Therefore, we
affirm.
[¶19.] GILBERTSON, Chief Justice, and ZINTER and KERN, Justices, and
WILBUR, Retired Justice, concur.
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APPENDIX 1