Noonan’s Notes Blog is written by a team of Hodgson Russ tax attorneys led by the blog’s namesake, Tim Noonan. Noonan’s Notes Blog regularly provides analysis of and commentary on developments in the world of New York tax law.

Wayfair Settles!

By way of a brief background, in 2016, the South Dakota State Legislature passed Senate Bill 106, which required out-of-state retailers to collect and remit sales tax similar to in-state retailers. The law applies to out-of-state retailers if they have more than $100,000 in sales or complete more than 200 transactions per year within South Dakota. Given the controlling precedent of Quill, on October 2, 2017, the Attorney General's Office filed a petition for certiorari asking the U.S. Supreme Court to review the South Dakota Supreme Court decision in State of South Dakota v. Wayfair, Overstock and Newegg. In Quill, the U.S. Supreme Court had required that a retailer have a “physical presence” within a state before a seller can be obligated to collect and remit that state's sales taxes on purchases delivered into the state. On June 21, 2018, in one of the most important state tax decisions in decades, the United States Supreme Court overruled the physical presence requirement.

But after upholding South Dakota’s economic nexus sales and use tax requirements in its June 21, 2018 decision, the U.S. Supreme Court remanded Wayfair to the state’s high court to address "any remaining claims regarding the Commerce Clause's application in the absence of Quill and Bellas Hess."  [386 U.S. 753, 87 S. Ct. 1389, 18 L. Ed. 2d 505 (1967)]. Further litigation ensued during July 2018, then on August 9, the Supreme Court of the State of South Dakota remanded the case to the state circuit court.  Apparently, the parties have been negotiating a settlement since July.

Although the State did not make the settlement agreements available yet, the final settlement agreement brings a conclusion to all remaining issues not addressed by the United States Supreme Court. According to Governor Daugaard and AG Jackley’s statements made November 1 in taxnotes, the Wayfair settlement agreement would lift the injunction that had been preventing the state from requiring the litigants to comply with S.B. 106, its remote seller law. Also, under the terms of the Wayfair settlement, the three companies would comply with South Dakota’s remote seller collection requirements starting January 1, 2019.

Of course, the problem is that this settlement theoretically leaves the open questions around nexus unresolved.  Indeed, the Supreme Court did not explicitly bless the South Dakota thresholds in its decision.  The Court only overruled the Quill physical-presence rule, and then remanded the case back to the South Dakota Supreme Court for a fresh analysis of the nexus issue without being bound by Quill.  That said, the Court did signal that the South Dakota thresholds were probably OK, noting the lack of retroactivity, reasonable thresholds, and South Dakota’s participation in the Streamlined Sales Tax Project.  But that was merely dicta.  And now with the case being closed out, the Court will not be able to affirmatively bless the South Dakota law.  So states are now free to figure out what the thresholds are or should be, and taxpayers are left to fend for themselves!

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