April 17, 2018
TO THE SUPREME COURT OF SOUTH DAKOTA
South Dakota, like many States, taxes the retail sales of
goods and services in the State. 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. Under National Bellas Hess, Inc. v.
Department of Revenue of III., 386 U.S. 753, and
Quill Corp. v. North Dakota, 504 U.S. 298, South
Dakota may not require a business that has no physical
presence in the State to collect its sales tax. Consumer
compliance rates are notoriously low, however, and it is
estimated that Bellas Hess and Quill cause
South Dakota to lose between $48 and $58 million annually.
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." 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.
Respondents, top online retailers with no employees or real
estate in South Dakota, each meet the Act's minimum sales
or transactions requirement, but do not collect the
State's sales tax. South Dakota filed suit in state
court, seeking a declaration that the Act's requirements
are valid and applicable to respondents and an injunction
requiring respondents to register for licenses to collect and
remit the sales tax. Respondents sought summary judgment,
arguing that the Act is unconstitutional. The trial court
granted their motion. The State Supreme Court affirmed on the
ground that Quill is controlling precedent.
the physical presence rule of Quill is unsound and
incorrect, Quill Corp. v. North Dakota, 504 U.S.
298, and National Bellas Hess, Inc. v.
Department of Revenue of III., 386 U.S. 753, are
overruled. Pp. 5-24.
(a) An understanding of this Court's Commerce Clause
principles and their application to state taxes is
instructive here. Pp. 5-9.
(1) Two primary principles mark the boundaries of a
State's authority to regulate interstate commerce: State
regulations may not discriminate against interstate commerce;
and States may not impose undue burdens on interstate
commerce. These principles guide the courts in adjudicating
challenges to state laws under the Commerce Clause. Pp. 5-7.
(2) They also animate Commerce Clause precedents addressing
the validity of state taxes, which will be sustained so long
as they (1) apply to an activity with a substantial nexus
with the taxing State, (2) are fairly apportioned, (3) do not
discriminate against interstate commerce, and (4) are fairly
related to the services the State provides. See Complete
Auto Transit, Inc. v. Brady, 430 U.S. 274, 279. Before
Complete Auto, the Court held in Bellas
Hess that a "seller whose only connection with
customers in the State is by common carrier or . . .
mail" lacked the requisite minimum contacts with the
State required by the Due Process Clause and the Commerce
Clause, and that unless the retailer maintained a physical
presence in the State, the State lacked the power to require
that retailer to collect a local tax. 386 U.S., at 758. In
Quill, the Court overruled the due process holding,
but not the Commerce Clause holding, grounding the physical
presence rule in Complete Auto's requirement
that a tax have a "substantial nexus" with the
activity being taxed. Pp. 7-9.
(b) The physical presence rule has long been criticized as
giving out-of-state sellers an advantage. Each year, it
becomes further removed from economic reality and results in
significant revenue losses to the States. These critiques
underscore that the rule, both as first formulated and as
applied today, is an incorrect interpretation of the Commerce
Clause. Pp. 9-17.
(1) Quill is flawed on its own terms. First, the
physical presence rule is not a necessary interpretation of
Complete Auto's nexus requirement. That
requirement is "closely related, " Bellas
Hess, 386 U.S. at 756, to the due process requirement
that there be "some definite link, some minimum
connection, between a state and the person, property or
transaction it seeks to tax." Miller Brothers Co. v.
Maryland, 347 U.S. 340, 344-345. And, as Quill
itself recognized, a business need not have a physical
presence in a State to satisfy the demands of due process.
When considering whether a State may levy a tax, Due Process
and Commerce Clause standards, though not identical or
coterminous, have significant parallels. The reasons given in
Quill for rejecting the physical presence rule for
due process purposes apply as well to the question whether
physical presence is a requisite for an out-of-state
seller's liability to remit sales taxes. Other aspects of
the Court's doctrine can better and more accurately
address potential burdens on interstate commerce, whether or
not Quill's physical presence rule is satisfied.
Second, Quill creates rather than resolves market
distortions. In effect, it is a judicially created tax
shelter for businesses that limit their physical presence in
a State but sell their goods and services to the State's
consumers, something that has become easier and more
prevalent as technology has advanced. The rule also produces
an incentive to avoid physical presence in multiple States,
affecting development that might be efficient or desirable.
Third, Quill imposes the sort of arbitrary,
formalistic distinction that the Court's modern Commerce
Clause precedents disavow in favor of "a sensitive,
case-by-case analysis of purposes and effects, "
West Lynn Creamery, Inc. v. Healy, 512 U.S. 186,
201. It treats economically identical actors differently for
arbitrary reasons. For example, a business that maintains a
few items of inventory in a small warehouse in a State is
required to collect and remit a tax on all of its sales in
the State, while a seller with a pervasive Internet presence
cannot be subject to the same tax for the sales of the same
items. Pp. 10-14.
(2) When the day-to-day functions of marketing and
distribution in the modern economy are considered, it becomes
evident that Quill's physical presence rule is
artificial, not just "at its edges, " 504 U.S. at
315, but in its entirety. Modern e-commerce does not align
analytically with a test that relies on the sort of physical
presence defined in Quill. And the Court should not
maintain a rule that ignores substantial virtual connections
to the State. Pp. 14-15.
(3) The physical presence rule of Bellas Hess and
Quill is also an extraordinary imposition by the
Judiciary on States' authority to collect taxes and
perform critical public functions. Forty-one States, two
Territories, and the District of Columbia have asked the
Court to reject Quill's test. Helping
respondents' customers evade a lawful tax unfairly shifts
an increased share of the taxes to those consumers who buy
from competitors with a physical presence in the State. It is
essential to public confidence in the tax system that the
Court avoid creating inequitable exceptions. And it is also
essential to the confidence placed in the Court's
Commerce Clause decisions. By giving some online retailers an
arbitrary advantage over their competitors who collect state
sales taxes, Quill's physical presence rule has
limited States' ability to seek long-term prosperity and
has prevented market participants from competing on an even
playing field. Pp. 16-17.
(c) Stare decisis can no longer support the
Court's prohibition of a valid exercise of the
States' sovereign power. If it becomes apparent that the
Court's Commerce Clause decisions prohibit the States
from exercising their lawful sovereign powers, the Court
should be vigilant in correcting the error. It is
inconsistent with this Court's proper role to ask
Congress to address a false constitutional premise of this
Court's own creation. The Internet revolution has made
Quill's original error all the more egregious
and harmful. The Quill Court did not have before it
the present realities of the interstate marketplace, where
the Internet's prevalence and power have changed the
dynamics of the national economy. The expansion of e-commerce
has also increased the revenue shortfall faced by States
seeking to collect their sales and use taxes, leading the
South Dakota Legislature to declare an emergency. The
argument, moreover, that the physical presence rule is clear
and easy to apply is unsound, as attempts to apply the
physical presence rule to online retail sales have proved
Because the physical presence rule as defined by
Quill is no longer a clear or easily applicable
standard, arguments for reliance based on its clarity are
misplaced. Stare decisis may accommodate
"legitimate reliance interest[s], " United
States v. Ross, 456 U.S. 798, 824, but a business
"is in no position to found a constitutional right ...
on the practical opportunities for tax avoidance, "
Nelson v. Sears, Roebuck & Co., 312 U.S. 359,
366. Startups and small businesses may benefit from the
physical presence rule, but here South Dakota affords small
merchants a reasonable degree of protection. Finally, other
aspects of the Court's Commerce Clause doctrine can
protect against any undue burden on interstate commerce,
taking into consideration the small businesses, startups, or
others who engage in commerce across state lines. The
potential for such issues to arise in some later case cannot
justify retaining an artificial, anachronistic rule that
deprives States of vast revenues from major businesses. Pp.
(d) In the absence of Quill and Bellas
Hess, the first prong of the Complete Auto test
simply asks whether the tax applies to an activity with a
substantial nexus with the taxing State, 430 U.S., at 279.
Here, the nexus is clearly sufficient. The Act applies only
to sellers who engage in a significant quantity of business
in the State, and respondents are large, national companies
that undoubtedly maintain an extensive virtual presence. Any
remaining claims regarding the Commerce Clause's
application in the absence of Quill and Bellas
Hess may be addressed in the first instance on remand.
2017 S.D. 56, 901 N.W.2d 754, vacated and remanded.
KENNEDY, J., delivered the opinion of the Court, in which
THOMAS, GINSBURG, ALITO, and GORSUCH, JJ., joined.
consumer purchases goods or services, the consumer's
State often imposes a sales tax. This case requires the Court
to determine when an out-of-state seller can be required to
collect and remit that tax. All concede that taxing the sales
in question here is lawful. The question is whether the
out-of-state seller can be held responsible for its payment,
and this turns on a proper interpretation of the Commerce
Clause, U.S. Const., Art. I, §8, cl. 3.
earlier cases the Court held that an out-of-state
seller's liability to collect and remit the tax to the
consumer's State depended on whether the seller had a
physical presence in that State, but that mere shipment of
goods into the consumer's State, following an order from
a catalog, did not satisfy the physical presence requirement.
National Bellas Hess, Inc. v. Department of Revenue of
III, 386 U.S. 753 (1967); Quill Corp. v. North
Dakota, 504 U.S. 298 (1992). The Court granted
certiorari here to reconsider the scope and validity of the
physical presence rule mandated by those cases.
most States, South Dakota has a sales tax. It taxes the
retail sales of goods and services in the State. S. D.
Codified Laws §§10-45-2, 10-45-4 (2010 and Supp.
2017). Sellers are generally required to collect and remit
this tax to the Department of Revenue. §10-45-27.3. If
for some reason the sales tax is not remitted by the seller,
then instate consumers are separately responsible for paying
a use tax at the same rate. See §§10-46-2, 10-46-4,
10-46-6. Many States employ this kind of complementary sales
and use tax regime.
this Court's decisions in Bellas Hess and
Quill, South Dakota may not require a business to
collect its sales tax if the business lacks a physical
presence in the State. Without that physical presence, South
Dakota instead must rely on its residents to pay the use tax
owed on their purchases from out-of-state sellers.
"[T]he impracticability of [this] collection from the
multitude of individual purchasers is obvious."
National Geographic Soc. v. California Bd. of
Equalization, 430 U.S. 551, 555 (1977). And consumer
compliance rates are notoriously low. See, e.g.,
GAO, Report to Congressional Requesters: Sales Taxes, States
Could Gain Revenue from Expanded Authority, but Businesses
Are Likely to Experience Compliance Costs 5 (GAO-18-114, Nov.
2017) (Sales Taxes Report); California State Bd. of
Equalization, Revenue Estimate: Electronic Commerce and Mail
Order Sales 7 (2013) (Table 3) (estimating a 4 percent
collection rate). It is estimated that Bellas Hess
and Quill cause the States to lose between $8 and
$33 billion every year. See Sales Taxes Report, at 11-12
(estimating $8 to $13 billion); Brief for Petitioner 34-35
(citing estimates of $23 and $33.9 billion). In South Dakota
alone, the Department of Revenue estimates revenue loss at
$48 to $58 million annually. App. 24. Particularly because
South Dakota has no state income tax, it must put substantial
reliance on its sales and use taxes for the revenue necessary
to fund essential services. Those taxes account for over 60
percent of its general fund.
2016, South Dakota confronted the serious inequity
Quill imposes by enacting S. 106-"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. 106, 2016 Leg. Assembly, 91st
Sess. (S. D. 2016) (S. B. 106). The legislature found that
the inability to collect sales tax from remote sellers was
"seriously eroding the sales tax base" and
"causing revenue losses and imminent harm . . . through
the loss of critical funding for state and local
services." §8(1). The legislature also declared an
emergency: "Whereas, this Act is necessary for the
support of the state government and its existing public
institutions, an emergency is hereby declared to exist."
§9. Fearing further erosion of the tax base, the
legislature expressed its intention to "apply South
Dakota's sales and use tax obligations to the limit of
federal and state constitutional doctrines" and noted
the urgent need for this Court to reconsider its precedents.
end, the Act requires out-of-state sellers to collect and
remit sales tax "as if the seller had a physical
presence in the state." §1. The Act applies only to
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. Ibid. The Act also forecloses the
retroactive application of this requirement and provides
means for the Act to be appropriately stayed until the
constitutionality of the law has been clearly established.
§§5, 3, 8(10).
Wayfair, Inc., Overstock.com, Inc., and Newegg,
Inc., are merchants with no employees or real estate in South
Dakota. Wayfair, Inc., is a leading online retailer of home
goods and furniture and had net revenues of over $4.7 billion
last year. Overstock.com, Inc., is one of the top
online retailers in the United States, selling a wide variety
of products from home goods and furniture to clothing and
jewelry; and it had net revenues of over $1.7 billion last
year. Newegg, Inc., is a major online retailer of consumer
electronics in the United States. Each of these three
companies ships its goods directly to purchasers throughout
the United States, including South Dakota. Each easily meets
the minimum sales or transactions requirement of the Act, but
none collects South Dakota sales tax. 2017 S. D. 56,
¶¶ 10-11, 901 N.W.2d 754, 759-760.
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 sales tax. App.
11, 30. Respondents moved for summary judgment, arguing that
the Act is unconstitutional. 901 N.W. 2d, at 759-760. South
Dakota conceded that the Act cannot survive under Bellas
Hess and Quill but asserted the importance,
indeed the necessity, of asking this Court to review those
earlier decisions in light of current economic realities. 901
N.W. 2d, at 760; see also S. B. 106, §8. The trial court
granted summary judgment to respondents. App. to Pet. for
South Dakota Supreme Court affirmed. It stated: "However
persuasive the State's arguments on the merits of
revisiting the issue, Quill has not been overruled
[and] remains the controlling precedent on the issue of
Commerce Clause limitations on interstate collection of sales
and use taxes." 901 N.W. 2d, at 761. This Court granted
certiorari. 583 U.S. ___ (2018).
Constitution grants Congress the power "[t]o regulate
Commerce . . . among the several States." Art. I,
§8, cl. 3. The Commerce Clause "reflect[s] a
central concern of the Framers that was an immediate reason
for calling the Constitutional Convention: the conviction
that in order to succeed, the new Union would have to avoid
the tendencies toward economic Balkanization that had plagued
relations among the Colonies and later among the States under
the Articles of Confederation." Hughes v.
Oklahoma, 441 U.S. 322, 325-326 (1979). Although the
Commerce Clause is written as an affirmative grant of
authority to Congress, this Court has long held that in some
instances it imposes limitations on the States absent
congressional action. Of course, when Congress exercises its
power to regulate commerce by enacting legislation, the
legislation controls. Southern Pacific Co. v. Arizona ex
rel. Sullivan, 325 U.S. 761, 769 (1945). But this Court
has observed that "in general Congress has left it to
the courts to formulate the rules" to preserve "the
free flow of interstate commerce." Id., at 770.
understand the issue presented in this case, it is
instructive first to survey the general development of this
Court's Commerce Clause principles and then to review ...