On September 13, 2017, the South Dakota Supreme Court unanimously affirmed a circuit court’s decision that a law requiring certain remote sellers that do not have a physical presence in South Dakota to collect sales tax on sales made in the state is unconstitutional. The collection and remittance duties are triggered if certain gross revenue or transaction thresholds are met. In affirming the circuit court, the Supreme Court agreed that the law violates the physical presence requirement for sales and use taxes under Quill v. North Dakota and its application of the Commerce Clause. This is the first time that a state’s highest court has considered the constitutionality of legislation that disregards the physical presence requirement.

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State & Local Tax Alert
Breaking state and local tax developments from Grant Thornton LLP
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South Dakota Supreme Court Holds Law Challenging Quill’s
Physical Presence Requirement Is Unconstitutional
On September 13, 2017, the South Dakota Supreme Court unanimously affirmed a circuit
court’s decision that a law requiring certain remote sellers that do not have a physical
presence in South Dakota to collect sales tax on sales made in the state is
unconstitutional.1 The collection and remittance duties are triggered if certain gross
revenue or transaction thresholds are met. In affirming the circuit court, the Supreme
Court agreed that the law violates the physical presence requirement for sales and use
taxes under Quill v. North Dakota2 and its application of the Commerce Clause. This is the
first time that a state’s highest court has considered the constitutionality of legislation that
disregards the physical presence requirement.
Contested Economic Presence Law
Under the contested legislation, certain remote sellers that sell tangible personal property,
products transferred electronically, or services for delivery into South Dakota are subject
to the state’s provisions governing the retail sales and service tax and uniform municipal
non-ad valorem tax, and are required to remit sales tax as if they had a physical presence
in the state.3 Remote sellers are subject to these provisions if they meet one of two
thresholds in either the previous calendar year or the current calendar year:
 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
 The seller sold tangible personal property, any product transferred electronically,
or services for delivery into South Dakota in 200 or more separate transactions.4
South Dakota is allowed to bring a declaratory judgment action in a circuit court against
any person it believes meets the above criteria to establish that the obligation to remit sales
1 South Dakota v. Wayfair Inc., South Dakota Supreme Court, No. 28160, Sep. 13, 2017. Considering
that the oral arguments were heard on August 29, 2017, the Court followed the law and
“expeditiously” decided this case.
2 504 U.S. 298 (1992).
3 S.D. CODIFIED LAWS §§ 10-64-1 to 10-64-9, as enacted by S.B. 106, Laws 2016. For a discussion
of this legislation, see GT SALT Alert: South Dakota Enacts Legislation Challenging Quill’s
Physical Presence Requirement.
4 S.D. CODIFIED LAWS § 10-64-2.
Release date
September 19, 2017
States
South Dakota
Issue/Topic
Sales and Use Tax
Contact details
John Stowe
Minneapolis
T 612.677.5310
E john.stowe@us.gt.com
Jamie C. Yesnowitz
Washington, DC
T 202.521.1504
E jamie.yesnowitz@us.gt.com
Chuck Jones
Chicago
T 312.602.8517
E chuck.jones@us.gt.com
Lori Stolly
Cincinnati
T 513.345.4540
E lori.stolly@us.gt.com
Priya D. Nair
Washington, DC
T 202.521.1546
E priya.nair@us.gt.com
www.GrantThornton.com/SALT

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tax is applicable and valid under state and federal law.5 The circuit court is directed to act
on the declaratory judgment “expeditiously” and to presume that the matter can be
resolved through a motion to dismiss or a motion for summary judgment.6 The filing of
the declaratory judgment action by the state operates as an injunction while the action is
pending, prohibiting any state entity from enforcing the sales tax remittance obligations
against any taxpayer who does not comply.7 Any appeal goes directly to the South Dakota
Supreme Court and must “be heard as expeditiously as possible.”8 Furthermore, the
legislation explains that it is intended to directly challenge Quill.9
Requirements Enjoined Before Effective Date
The law was scheduled to take effect on May 1, 2016, but South Dakota filed a declaratory
judgment action in late April 2016 against several remote sellers that also served to
immediately enjoin the collection and remittance requirements.10 Following this action, the
remote sellers attempted to change the venue of this case from state court to the U.S.
District Court for the District of South Dakota.11 On January 17, 2017, the U.S. District
Court granted the state’s motion to remand the case back to state court because the state’s
complaint did not “necessarily raise a stated federal issue.”12 In separate litigation also filed
in late April 2016, remote sellers are suing South Dakota and challenging the facial
constitutionality of the legislation.13 The two existing actions relating to the South Dakota
legislation have not been joined to date.
Circuit Court Held Law Is Unconstitutional
Less than two months after the case originally brought by South Dakota was remanded
back to the South Dakota circuit court, the court granted the remote sellers’ motion for
summary judgment, holding that the legislation “fails as a matter of law to satisfy the
physical presence requirement that remains applicable to state sales and use taxes under
Quill and its application of the Commerce Clause.”14 Because the remote sellers lacked
physical presence in the state, South Dakota acknowledged that it was prohibited from
imposing the sales tax collection and remittance requirements against these remote sellers
under Quill. Furthermore, the state openly acknowledged that Quill required the circuit
court to grant summary judgment in favor of the remote sellers.
In finding for the remote sellers, the circuit court agreed with the state’s acknowledgment
regarding Quill, explaining that it was “duty bound to follow applicable precedent of the
5 S.D. CODIFIED LAWS § 10-64-3.
6 Id.
7 S.D. CODIFIED LAWS § 10-64-4.
8 S.D. CODIFIED LAWS § 10-64-5.
9 S.D. CODIFIED LAWS § 10-64-1.
10 South Dakota v. Wayfair, Inc., No. 32CIV16-000092 (S.D. 6th Cir. Ct.), filed April 27, 2016.
11 South Dakota v. Wayfair, Inc., D.S.D., No. 3:16-CV-03019.
12 Id.
13 American Catalog Mailers Ass’n v. Gerlach, No. 32CIV16-000096 (S.D. 6th Cir. Ct.), filed April 29,
2016.
14 South Dakota v. Wayfair, Inc., No. 32CIV16-000092 (S.D. 6th Cir. Ct.), order granting defendant’s
motion for summary judgment, March 6, 2017. For a discussion of the circuit court’s order, see GT
SALT Alert: South Dakota Circuit Court Holds Law Challenging Quill’s Physical Presence
Requirement Is Unconstitutional.

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United States Supreme Court.” Accordingly, the court was required to follow Quill “even
when changing times and events clearly suggest a different outcome; it is simply not the
role of a state circuit court to disregard a ruling from the United States Supreme Court.”
Supreme Court Agrees Law Violates Quill
Based on the U.S. Supreme Court’s holdings in Bellas Hess15 and Quill, the South Dakota
Supreme Court held that the contested law, S.B. 106, could not impose an obligation on
the sellers to collect and remit sales tax because none of them had a physical presence in
the state. The Court did not find a “distinction between the collection obligations
invalidated in Quill and those imposed by Senate Bill 106, and [held] that the circuit court
correctly applied the law when it granted Sellers’ motion for summary judgment.”
The state argued that the U.S. Supreme Court should reconsider Bellas Hess and Quill
because changes in circumstances and technology have made these decisions outdated.
The South Dakota Supreme Court acknowledged that Justice Kennedy, in his concurrence
in Direct Marketing Association,16 recognized many of the state’s arguments supporting
reconsideration of these cases. In affirming the circuit court, the South Dakota Supreme
Court explained that “[h]owever persuasive the State’s arguments on the merits of
revisiting the issue, Quill has not been overruled.” The South Dakota Supreme Court was
required to follow Quill because it “remains the controlling precedent on the issue of
Commerce Clause limitations on interstate collection of sales and use taxes.”
Commentary
Last year, South Dakota became the first state to enact legislation that directly challenges
Quill’s physical presence requirement. In Quill, the U.S. Supreme Court held that, for
Commerce Clause nexus purposes, out-of-state retailers must have a physical presence in a
state before a state can require the retailer to collect sales tax. Due to the rapid expansion
of the Internet since Quill was decided in 1992, the way that consumers purchase items has
changed tremendously. As noted above, in his concurring opinion in Direct Marketing
Association, Justice Kennedy requested that the “legal system should find an appropriate
case for this Court to re-examine Quill and Bellas Hess.”
The South Dakota legislature clearly indicated that this law is intended to challenge Quill
and provided expedited court procedures for litigating this matter. The South Dakota
Supreme Court’s decision is significant because it is the first high court to consider the
constitutionality of one of the recent laws that directly challenges Quill.
Other states also have laws or regulations that challenge Quill’s physical presence
requirement. Earlier this year, Indiana,17 Maine18 and Wyoming19 enacted legislation that is
very similar to the South Dakota law and provides the same dollar and transaction
15 National Bellas Hess, Inc. v. Department of Revenue, 386 U.S. 753 (1967).
16 Direct Marketing Ass’n v. Brohl, 135 S. Ct. 1124 (2015) (Kennedy, J., concurring). For a discussion
of this case, see GT SALT Alert: U.S. Supreme Court Holds Challenge to Colorado’s Sales and Use
Tax Notice and Reporting Requirements Not Barred by Tax Injunction Act.
17 P.L. 247 (H.B. 1129), Laws 2017.
18 Ch. 245 (S.P. 483), Laws 2017.
19 Ch. 85 (H.B. 19), Laws 2017.

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thresholds. North Dakota20 and Vermont21 have enacted comparable laws, but their
effective dates are contingent. Different types of remote seller laws with economic nexus
components have been enacted by Ohio,22 Rhode Island23 and Washington.24 Two states,
Alabama25 and Tennessee,26 have promulgated regulations that require out-of-state sellers
to collect sales tax even though the sellers do not have a physical presence in the state. The
Massachusetts Department of Revenue issued a directive that would have imposed an
economic nexus standard, but withdrew the directive prior to its effective date.27 However,
the Department recently released a final regulation that adopts a similar economic nexus
standard.28
Due to the state trend of enacting laws or promulgating regulations that require remote
sellers without a physical presence to collect sales tax, the state tax community will be
closely following this case and whether the U.S. Supreme Court decides to revisit Quill. In
light of the national significance of this issue and the apparent interest by some of the
justices, there may be a greater probability that the Court will consider this case compared
to other cases concerning state tax issues.
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The information contained herein is general in nature and based on authorities that are subject to change.
It is not intended and should not be construed as legal, accounting or tax advice or opinion provided by
Grant Thornton LLP to the reader. This material may not be applicable to or suitable for specific
circumstances or needs and may require consideration of nontax and other tax factors. Contact Grant
Thornton LLP or other tax professionals prior to taking any action based upon this information. Grant
Thornton LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that
could affect information contained herein. No part of this document may be reproduced, retransmitted or
20 S.B. 2298, Laws 2017, effective on the date the U.S. Supreme Court issues an opinion overturning
Quill or otherwise confirming a state may constitutionally impose its sales or use tax upon an out-
of-state seller in circumstances similar to those in the economic nexus statute.
21 H. 873, Laws 2016, effective on the later of: (i) July 1, 2017; or (ii) the first day of the first quarter
after a controlling court decision or federal legislation abrogates the physical presence requirement
contained in Quill.
22 H.B. 49, Laws 2017.
23 Ch. 302 (H.B. 5175), Laws 2017.
24 Ch. 28 (H.B. 2163), Laws 2017, 3rd Special Session.
25 ALA. ADMIN. CODE r. 810-6-2-.90.03. For a discussion of this regulation, see GT SALT Alert:
New Alabama Regulation to Require Out-of-State Sellers to Collect Sales and Use Tax Contrary to
Supreme Court Precedent. Litigation challenging this regulation has been filed in the Alabama Tax
Tribunal. Newegg, Inc. v. Alabama Department of Revenue, Alabama Tax Tribunal, No. S. 16-613, filed
June 8, 2016.
26 TENN. COMP. R. & REGS. 1320-05-01-.129. A Tennessee chancery court has granted an order
prohibiting enforcement of the rule pending entry of a final judgment in this action. American
Catalog Mailers Ass’n v. Tennessee Department of Revenue, Tennessee Chancery Court, 20th Judicial
District, Davidson County, Part IV, at Nashville, No. 17-307-IV, agreed order granting joint
motion for entry of agreed order preventing enforcement of Rule 129, April 10, 2017. For further
discussion, see GT SALT Alert: Tennessee Chancery Court Issues Order Suspending Rule
Requiring Certain Remote Sellers to Collect Sales Tax.
27 Directive 17-2, Massachusetts Department of Revenue, June 28, 2017. For further information, see
GT SALT Alert: Massachusetts DOR Revokes Directive Explaining Bright-Line Sales Tax Nexus
Standard for Remote Internet Vendors.
28 MASS. REGS. CODE tit. 830, § 64H.1.7.

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