South Dakota reaches settlement; dismisses Wayfair litigation


John Stowe
T +1 612 677 5310

Jamie C. Yesnowitz
Washington, DC
T +1 202 521 1504

Chuck Jones
T +1 312 602 8517

Lori Stolly
T +1 513 345 4540

Metisse Lutz
T +1 303 813 3973
On Oct. 31, 2018, South Dakota Gov. Dennis Daugaard announced that the state has entered into a settlement agreement and a stipulation of dismissal in South Dakota v. Wayfair, Inc.1 Under the settlement agreement, the three litigants in the case, Wayfair, Overstock and Newegg, will begin collecting sales tax on Jan. 1, 2019. Because the Wayfair litigants will not be challenging the South Dakota remote seller law on grounds other than the substantial nexus argument rejected by the U.S. Supreme Court, the settlement agreement provides Wayfair with a new level of finality. Other remote sellers meeting the economic nexus threshold are required to collect South Dakota sales tax beginning on Nov. 1, 2018, pursuant to legislation that was enacted on Sept. 12, 2018.2

Background On March 22, 2016, South Dakota enacted legislation, S.B. 106, under which certain remote sellers, selling tangible personal property, products transferred electronically, or services for delivery into South Dakota became subject to the state’s provisions governing the retail sales and service tax and uniform municipal non-ad valorem tax. As a result, such sellers were required to collect and remit sales tax as if they had a physical presence in the state.3 Remote sellers became subject to these provisions if they met one of two thresholds in either the previous 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 exceeded $100,000
  • The seller sold tangible personal property, any product transferred electronically, or services for delivery into South Dakota in 200 or more separate transactions.4

The legislation was scheduled to go into effect on May 1, 2016, but South Dakota filed a declaratory judgment action in late April 2016 against Wayfair and other remote sellers that also served to immediately enjoin the collection and remittance requirements. 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 Corp. v. North Dakota.5 Based on the U.S. Supreme Court’s holdings in National Bellas Hess, Inc. v. Department of Revenue of Illinois6 and Quill, the South Dakota Supreme Court held in Wayfair that 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.7

U.S. Supreme Court decision On June 21, 2018, the U.S. Supreme Court decided Wayfair and in doing so, expressly overruled Quill, stating that the physical presence rule is “unsound and incorrect.” The Court concluded that the South Dakota statute satisfies the substantial nexus standard that is a component of determining whether a tax can survive Dormant Commerce Clause scrutiny. The Court vacated the South Dakota Supreme Court’s decision and remanded the case to consider whether the South Dakota statute could be challenged on an alternative basis under the Commerce Clause.
Enactment of 2018 legislation Following the U.S. Supreme Court’s decision, the South Dakota Department of Revenue explained that the injunction was still in place and it was unable to enforce the remote seller nexus law. On Sept. 4, 2018, South Dakota introduced two sales and use tax bills in response to Wayfair, affecting remote sellers and marketplace providers. Daugaard called for a special legislative session and signed both bills on Sept. 12, 2018.
S.B. 1, the remote seller bill, amended certain aspects of the original 2016 legislation, but retained the substantive economic nexus thresholds endorsed in Wayfair. On Nov. 1, 2018, remote sellers who meet at least one of the economic nexus thresholds are required to collect and remit sales tax.8 The legislation made particular reference to the Wayfair litigants, noting that they would be excluded from this new deadline to collect.9 Those litigants’ tax collection requirements would still be either subject to judicial determination, as their case continued to move through the South Dakota court system, or be governed by a potential settlement agreement. The legislation dissolved and lifted the injunction against the collection of sales tax on remote sellers other than the Wayfair litigants.
S.B. 2 expanded the concepts introduced in S.B. 106 and S.B. 1 to marketplace providers. On or after March 1, 2019, certain marketplace providers are required to collect and remit sales tax on behalf of sellers using their services, when certain specified conditions are met.
Settlement agreement On Oct. 31, 2018, Daugaard announced that South Dakota had entered into a settlement agreement and stipulation of dismissal in Wayfair.10 According to the governor, “[t]his final settlement agreement brings a conclusion to all remaining issues not addressed by the United States Supreme Court.” The settlement removes the injunction that prevented the state from requiring the Wayfair litigants to comply with the remote seller law. Under the terms of the settlement, the Wayfair litigants (Wayfair, Overstock and Newegg) will comply with the law beginning Jan. 1, 2019. The state also reached a settlement agreement in related litigation, American Catalog Mailers Association v. Gerlach.11
Commentary The settlement and conclusion of Wayfair is noteworthy because it precludes the litigants from raising other challenges to the contested South Dakota remote seller statute. In Wayfair, the U.S. Supreme Court vacated the decision and remanded the case to South Dakota because “[t]he question remains whether some other principle in the Court’s Commerce Clause doctrine might invalidate the [statute].” Because the statute clearly violated the Quill physical presence rule, other potential Commerce Clause concerns were not litigated or briefed. As a result, the South Dakota courts were directed to consider other potential claims. There was a possibility that the Court expanded the remand beyond the Commerce Clause and an analysis of the other three factors of Complete Auto Transit, Inc. v. Brady.12 By settling the case, the Wayfair litigants will not pursue a challenge of the South Dakota remote seller statute based on the remaining Commerce Clause arguments or any other grounds. The Governor’s announcement notes that the Wayfair settlement agreement and dismissals of both cases await final approval by the state circuit court, but given the Supreme Court’s decision, specific state legislative action addressing the Wayfair decision and the terms of the settlement agreement, it would be very surprising if the state circuit court were to do anything but accept the terms of the settlement.
States by and large will view the finality of Wayfair in South Dakota as further endorsement of the ability to quickly enact economic nexus statutes and policies on remote businesses that substantially align with the dictates of the Supreme Court’s decision, and may further drive discussions between the states and impacted stakeholders in an effort to create some level of uniformity in this area. However, other businesses potentially could challenge the remote seller statutes enacted by South Dakota on constitutional grounds other than substantial nexus, as well as challenge the comparable statutes and policies adopted in states other than South Dakota. In addition, businesses potentially could challenge economic nexus statutes and policies addressing fact patterns that are materially different than the Wayfair domestic-based remote seller fact pattern, including the issue of whether marketplace providers can be subject to these rules.
Daugaard’s statement does not provide specific details regarding the settlement agreement. However, the three Wayfair litigants will benefit to some extent because they are not required to comply with the South Dakota remote seller requirements until Jan. 1, 2019. As discussed above, other remote sellers must comply with the law effective on Nov. 1, 2018. Due to the large size of the three litigants, the postponement of the remote seller requirements by two months could provide a substantial competitive advantage in the South Dakota marketplace to these businesses this upcoming holiday season.

1 Press Release, Office of South Dakota Governor, Oct. 31, 2018. South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018). For a discussion of this case, see GT SALT Alert: U.S. Supreme Court Decides South Dakota v. Wayfair, Overruling Quill Physical Presence Requirement
2 S.B. 1 and S.B. 2, Laws 2018 (1st Special Session). For a discussion of this legislation, see GT SALT Alert: South Dakota Passes Economic Nexus Bills and Lifts Injunction on Wayfair
3 S.D. CODIFIED LAWS §§ 10-64-1 to 10-64-9, as enacted by S.B. 106, Laws 2016. 
4 S.D. CODIFIED LAWS § 10-64-2.
5 504 U.S. 298 (1992).
6 386 U.S. 753 (1967).
7 901 N.W.2d 754 (S.D. 2017), cert. granted, 199 L. Ed. 2d 602 (2018).
8 See S.D. CODIFIED LAWS § 10-64-4. The legislation confirmed that such an obligation would not be imposed on a retroactive basis. S.D. CODIFIED LAWS § 10-64-6.
9 See S.D. CODIFIED LAWS § 10-64-7.
10 Press Release, Office of South Dakota Governor, Oct. 31, 2018.
11 No. 32CIV16-000096 (S.D. 6th Cir. Ct.), filed April 29, 2016. In this separate litigation, remote sellers sued South Dakota and challenged the facial constitutionality of the law.
12 430 U.S. 274 (1977). The four-prong Complete Auto Transit test requires that: (1) there must be a substantial nexus between the taxpayer and the state; (2) the tax must be fairly apportioned; (3) the tax must not discriminate against interstate commerce; and (4) the tax must be fairly related to the services provided by the state. Wayfair considered the substantial nexus requirement.

This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.