By Deborah White
Last Friday, the state of South Dakota filed a compelling motion in favor of remanding its case against on-line retailers back to state court. The motion makes clear that state court is the proper venue to start a case that will put the following constitutional question to the U.S. Supreme Court: whether the ubiquitous economic presence of today's major on-line retailers is constitutionally sufficient to give states the authority to require those retailers to collect and remit the sales tax that is due on all sales transactions and that physically present, brick-and-mortar retailers already collect and remit.
Three months ago, South Dakota filed a lawsuit against several on-line retailers seeking a determination that the state may validly require out-of-state retailers without a physical presence in the state to collect and remit the state's sales tax on purchases made in the state. The lawsuit, filed in state court, came one year after U.S. Supreme Court Justice Anthony Kennedy recognized in his concurring opinion in DMA v. Brohl that, "[t]he Internet has caused far-reaching systemic and structural changes in the economy" so that "a business may be present in a State in a meaningful way without that presence being physical in the traditional sense of the word." Justice Kennedy then called on the "legal system [to] find an appropriate case for this Court to reconsider" its prior decisions in Quill and Bellas Hess.
In response to the state's suit, defendants removed the case to federal district court (despite the fact that their counsel had filed a parallel suit on the exact same legal question against the state in state court just one day after the state initiated its lawsuit). The retail community agrees with the state of South Dakota that the case should be heard in the state judicial system. Considering the case in state court best represents the intent of the South Dakota legislature and, more importantly, follows Supreme Court precedent in cases in which a state seeks a declaratory judgment that its law is consistent with federal requirements.
Legislative Intent Clear
The state's lawsuit was originally initiated in furtherance of a law passed by the South Dakota legislature earlier this year that clearly presents the question of whether economic nexus (without physical presence) is sufficient to require online-only retailers to collect the state sales tax.
The legislation isolates the core legal question in Quill and cleanly presents the issue of whether out of state sellers that do not have a physical presence in the state may be compelled to comply with the state's tax laws as if they did have a local storefront, provided that their sales meet a significant threshold.
Given the harms recognized by Justice Kennedy, timeliness is an important element of a viable Quill challenge and that is built into the South Dakota legislation, too. The South Dakota law expressly authorizes the State to seek judicial resolution of the core legal issue through a declaratory judgment action (rather than an audit or other tax collection procedure) and directs the circuit court to act "as expeditiously as possible." The legislation further asks the circuit court to assume that its consideration can be completed through procedural motions, rather than requiring a full trial. Appeals from the State circuit court's decision may only be made to the state supreme court, which is also directed to act "as expeditiously as possible."
In seeking to have the case heard in federal court, the defendants are ignoring the will of the state legislature to have the case speedily resolved to protect the interests of the State and all retailers – whether they operate solely online or also have a physical presence in the state.
Supreme Court precedent makes clear this is an issue for state court
As compellingly argued in South Dakota's pleadings, remanding this case back to state court follows clear Supreme Court precedent in state tax cases and avoids potential jurisdictional issues at later appellate stages.
In Franchise Tax Board of Cal. v. Construction Laborers Vacation Trust, the Supreme Court ruled that federal courts lack removal jurisdiction in declaratory judgment cases in which a State seeks a declaration that its own law is constitutional. Similarly, in Levin v. Commerce Energy, Inc., the Court ruled that state tax cases analogous to the South Dakota lawsuit belong in state courts as a matter of federal-state comity.
If the district court ignores clear Supreme Court precedent on the jurisdictional issue, either the Eighth Circuit or the U.S. Supreme Court could ultimately decide that it cannot reach the merits of the case until the litigation has been properly heard in state court. In that case the lawsuit would be required to start from the beginning in the same state court in which the state filed its lawsuit. Such an outcome would mean years of additional litigation while the important constitutional issue remained unresolved. However, if the case is remanded to state court now, this costly potential detour thru the federal judiciary would be completely avoided.
A quick remedy is best for all involved
Given the economic impact to all retailers and the budget implications for the states, this issue is one that must be resolved and its resolution should happen as quickly and efficiently as possible. In light of the challenges that hinder federal congressional action, all sellers, regardless of their position on Quill, should desire a speedy judicial resolution of the core constitutional question or else remote sellers will continue to face a barrage of state laws designed to create nexus through all sorts of different mechanisms that skirt the limits of Quill, such as the Colorado consumer notification law upheld by the Tenth Circuit in DMA v. Brohl. Additionally, several state legislatures have been or are actively considering legislation that could precipitate another lawsuit. And there very well may be other states that will consider (or are considering) developing litigation based on their existing laws.
The explosion of online commerce in the decades following Quill has created economic disparities and state tax quandaries that need to be resolved. Speedy consideration of the lawsuit in state court will mean the fastest possible review of the core constitutional issue by the U.S. Supreme Court, and finality for both retailers and states on the issue of remote sales tax collection.