One Step Closer to Quill’s Downfall? South Dakota Supreme Court Hears Oral Arguments in 'Kill-Quill' Case

by Reed Smith
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Reed Smith

The South Dakota Supreme Court heard oral argument in South Dakota v. Wayfair, Inc. The case involves a South Dakota law enacted in 2016 that imposes an economic nexus standard to determine whether out-of-state retailers are required to collect and remit sales tax on sales made to South Dakota purchasers. This case is the first one challenging a so-called “kill-Quill” statute to reach the highest court in a state. At oral argument, South Dakota conceded that the law is unconstitutional under the standard set forth by the U.S. Supreme Court in Quill Corp. v. North Dakota, and requested the court to issue a decision ruling in favor of the retailers, while at the same time urging the United States Supreme Court to review the decision.

In Quill Corp. v. North Dakota, the United States Supreme Court reaffirmed that a state can only impose a sales and use tax collection obligation on a vendor physically present in the state.1 Since the Court decided Quill in 1992, states have lamented the restrictions that the decision placed on their ability to collect sales and use tax on sales by out-of-state retailers. These complaints have only grown louder with the rise of online retailing. In 2010, Colorado passed a use tax reporting regime that imposed reporting obligations (as opposed to tax collection obligations) on out-of-state retailers. Colorado’s law was challenged by the Direct Marketing Association (“DMA”), and that challenge ultimately reached the United States Supreme Court on jurisdictional grounds. Although the merits of the case were not before the Court, Justice Kennedy penned a concurring opinion urging the “legal system” to “find an appropriate case for this Court to reexamine Quill and Bellas Hess.”2

South Dakota took Justice Kennedy’s concurring opinion in DMA seriously, and on March 22, 2016, passed S.B. 106. This law directly contravenes Quill’s physical presence rule by adopting an economic nexus standard to determine whether out-of-state retailers are required to collect and remit sales tax for sales made to South Dakota purchasers. Specifically, the law requires that an out-of-state seller must collect sales tax on its sales to South Dakota purchasers if one of two conditions is satisfied:

  1. The seller’s gross revenue from the sale of tangible personal property, any product transferred electronically, or services delivered into South Dakota exceeds $100,000; or
  2. The seller sold tangible personal property, any product transferred electronically, or services for delivery into South Dakota in 200 or more separate transactions.3
  3. The Legislature acknowledged that S.B. 106 conflicted with the U.S. Supreme Court’s decision in Quill, and therefore stayed enforcement of the law “until the constitutionality of [S.B. 106] has been clearly established by a binding judgment, including, for example, a decision from the Supreme Court of the United States abrogating its existing doctrine, or a final judgment applicable to a particular taxpayer.”4

Procedural History

On April 28, 2016, South Dakota filed a declaratory action in South Dakota’s Sixth Judicial Circuit for a judgment that S.B. 106 imposed valid collection obligations on four out-of-state retailers: Overstock.com, Newegg, Systemax, and Wayfair (collectively, the “Retailers”).5 The Retailers filed a Motion for Summary Judgment on February 22, 2017, arguing that the Sixth Judicial Circuit was bound by the United State Supreme Court’s decision in Quill. South Dakota did not disagree with the Retailers’ argument, effectively conceding the entire case. On March 6, 2017, the Sixth Judicial Circuit granted the Retailers’ Motion for Summary Judgment. South Dakota subsequently appealed to the South Dakota Supreme Court, which in turn agreed to take the case and hold oral argument.

Today’s Oral Argument: South Dakota Concedes It Should Lose

South Dakota opened the argument by requesting the South Dakota Supreme Court to do three things:

  1. Affirm the lower court’s grant of the Retailers’ Motion for Summary Judgment;
  2. Affirm that grant expeditiously, in order to permit South Dakota to quickly file for cert at the United States Supreme Court; and
  3. Provide “a critical and important voice” urging the U.S. Supreme Court to grant cert.

South Dakota acknowledged that “the law has not changed”—Quill is still the law of the land—so the state is not asking for a ruling in its favor. In fact, the state conceded that the lower court’s decision against South Dakota was correct and should be affirmed. The state concluded its argument in less than 10 minutes.

Preview of Argument at U.S. Supreme Court?

As one would expect, the Retailers agreed that the South Dakota Supreme Court should rule in its favor. The focus of the Retailers’ argument, then, was that the South Dakota Supreme Court should not author an opinion urging the United States Supreme Court to grant cert. The attorney for the Retailers made several arguments in favor of retaining Quill’s physical presence rule, and supported these arguments with new facts and statistics—possibly foreshadowing the focus of their argument if the U.S. Supreme Court were to grant cert.

First, the Retailers argued that important facts were not developed and included in the record at the lower court. For example, what are the compliance burdens the Retailers would face if required to comply with South Dakota’s law? How much revenue do the Retailers anticipate to lose if the physical presence rule is overturned? Without answers to these important questions, the Retailers argued, the South Dakota Supreme Court does not have the facts necessary to support the state’s cert petition.

Second, the state’s argument that Quill costs it substantial tax revenue is unproven and overstated, and even if true years ago, it is no longer true today. For example, 17 of the 18 largest online retailers collect tax in nearly every state. South Dakota relied on a 2009 study to demonstrate the magnitude of the sales tax revenue uncollected as a result of Quill, but the world has significantly changed since 2009. The Retailers noted that in 2009, Amazon.com collected sales tax in only five states. However, today, Amazon.com collects sales tax in every state that imposes such a tax. As a consequence, the Retailers argued that even if Quill presented a major limitation on state sales tax revenue in 2009, it no longer does so today.

Finally, the Retailers argued that abandoning Quill’s physical presence rule would impose substantial burdens on small and mid-size retailers. Those burdens may be so substantial that some businesses would decide not to engage in interstate commerce. For example, consider the number of taxing jurisdictions in which businesses could be required to register, collect and remit tax. In 1967—the year the U.S. Supreme Court first articulated the physical presence rule—there were approximately 2,300 taxing jurisdictions in the United States. In 1992—when the Court reaffirmed the physical presence rule in Quill—there were approximately 6,000 taxing jurisdictions. And today, there are more than 12,000 state and local taxing jurisdictions. Without Quill’s physical presence rule, a small business owner might be forced to sell locally, not nationally, simply to avoid the compliance costs of collecting, reporting and remitting tax for thousands of jurisdictions. Such a result demonstrates that the physical presence rule is necessary to create and sustain a national economy, one of the animating principles of the dormant Commerce Clause.

What’s Next?

South Dakota urged the South Dakota Supreme Court to issue an opinion “as expeditiously as practical.” It is highly likely that the South Dakota Supreme Court will affirm the lower court’s holding that S.B. 106 is unconstitutional. What is impossible to predict is whether that decision will take a position on whether the United States Supreme Court should grant cert or will remain silent. A decision urging the Court to grant cert would likely be viewed as a victory for South Dakota.


  1. 504 U.S. 298 (1992).
  2. Direct Marketing Ass’n v. Brohl, 123 S. Ct. 1124, 1135 (Kennedy, J. concurring) (2015).
  3. S.B. 106, § 9, 2016 Leg., 91st Sess. (S.D. 2016).
  4. Id. at § 8(10).
  5. Systemax was dismissed from the action May 5, 2016, because it voluntary registered and began collecting South Dakota sales tax.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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