AUGUST 29, 2017.
FROM THE CIRCUIT COURT OF THE SIXTH JUDICIAL CIRCUIT HUGHES
COUNTY, SOUTH DAKOTA THE HONORABLE MARK W. BARNETT Judge
J. JACKLEY Attorney General RICHARD M. WILLIAMS Deputy
Attorney General KIRSTEN E. JASPER Assistant Attorney General
Pierre, South Dakota ANDREW L. FERGEL Chief Legal Counsel
Department of Revenue Pierre, South Dakota RONALD A. PARSONS,
JR. of Johnson, Janklow, Abdallah, Reiter & Parsons, LLP
Sioux Falls, South Dakota ERIC F. CITRON of Goldstein &
Russell, PC Bethesda, Maryland Attorneys for plaintiff and
S. ISAACSON MARTIN I. EISENSTEIN MATTHEW P. SCHAEFER of Brann
& Isaacson Lewiston, Maine JEFF BRATKIEWICZ KATHRYN J.
HOSKINS of Bangs, McCullen, Butler, Foye & Simmons, LLP
Sioux Falls, South Dakota Attorneys for defendants and
South Dakota has no state income tax and relies on retail
sales and use taxes for much of its revenue. Pursuant to
state statute, sales tax is generally collected by sellers
selling merchandise in this state at the point of sale and is
remitted to the state by those sellers. SDCL
10-45-27.3. Decisions from the United States Supreme
Court interpreting the Commerce Clause of the United States
Constitution prohibit the State of South Dakota from imposing
this collection obligation on sellers with no physical
presence in the state. As Internet sales by these sellers
have risen, state revenues have decreased. Faced with
declining revenues, the 2016 South Dakota Legislature passed
legislation extending the obligation to collect and remit
sales tax to sellers with no physical presence in the state.
S.B. 106, 2016 Legis. Assemb., 91st Sess. § 1 (S.D.
2016). The Legislature specifically passed the
legislation to challenge the Supreme Court's Commerce
Clause decisions. Id. § 8. Pursuant to the
legislation, the State of South Dakota commenced a
declaratory judgment action in circuit court seeking a
declaration that certain Internet sellers
(Sellers) with no physical presence in the state
must comply with the requirements of the 2016 legislation.
Id. § 2. Sellers moved for summary judgment.
Adhering to Supreme Court precedent, the circuit court
granted the motion, entered judgment for Sellers, and
enjoined the State from enforcing the 2016 legislation. The
State appeals. We affirm.
and Procedural History
Generally, sellers selling merchandise in South Dakota have
an obligation to collect and remit sales tax on each
transaction to the Department of Revenue. SDCL 10-45-27.3.
However, the applicability of this requirement to sellers
with no physical presence in a state has been limited by the
Supreme Court's interpretations of the Commerce Clause
since at least 1967. The Commerce Clause generally grants
"exclusive authority [to] Congress to regulate trade
between the States[.]" Nat'l Be las Hess, Inc.
v. Dep't of Rev. of the St. of I l., 386 U.S. 753,
756, 87 S.Ct. 1389, 1391, 18 L.Ed.2d 505
(1967). In 1967, the Supreme Court held that the
Commerce Clause prohibited Illinois from requiring a mail
order seller in Missouri to collect and remit use
to Illinois for merchandise sold and shipped into that state.
The seller had no physical presence in Illinois, and its only
contacts with that state were by mail or common
carrier. The Court reasoned that exposing the
seller's interstate business to local "variations in
rates of tax . . . and record-keeping requirements"
would violate the purpose of the Commerce Clause "to
ensure a national economy free from . . . unjustifiable local
entanglements." Id. at 759-60, 87 S.Ct. at
1393. The Court concluded that "[u]nder the
Constitution, this [was] a domain where Congress alone [had]
the power of regulation and control."
In 1992, the Supreme Court, while limiting application of its
due process analysis, reaffirmed Be las Hess's
Commerce Clause limitations in Quill Corp. v. North
Dakota, 504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed.2d 91
(1992). In that case, the Court held that a mail-order house
with no physical presence in North Dakota could not be
required to collect and remit use tax to that state for
"property purchased for storage, use, or consumption
within the State." Id. at 302, 112 S.Ct. at
1908. Despite later developments in its Commerce Clause
jurisprudence, the Court adhered to the "bright-line
rule" of Be las Hess on the basis that it
"encourage[d] settled expectations and . . . foster[ed]
investment by businesses and individuals." Id.
at 316, 112 S.Ct. at 1915.
In 2015, the Supreme Court reviewed a Colorado law that
instead of imposing the obligation to collect and remit use
tax on sellers with no physical presence in that state,
imposed the obligation "to notify . . . customers of
their use-tax liability and to report" sales information
back to the state. Direct Marketing, U.S at ___, 135
S.Ct. at 1127 The issue before the Supreme Court was whether
the United States District Court had jurisdiction under the
Tax Injunction Act (28 USC § 1341) over a suit
challenging the new law on Commerce Clause grounds Justice
Kennedy, however, took the opportunity to write a concurrence
questioning the advisability of continuing to follow Be las
Hess and Quill in light of later Commerce Clause
jurisprudence and "in view of the dramatic technological
and social changes that [have] taken place in our
increasingly interconnected economy" Id. at
___, 135 S.Ct. at 1135 (Kennedy, J, concurring). Despite
noting the "startling revenue shortfall in many
States" due to Be las Hess and Qui l,
Justice Kennedy observed that Direct Marketing did
not raise reconsideration of those decisions "in a
manner appropriate for the Court to address it."
Id. Nevertheless, he concluded that Direct
Marketing provided "the means to note the
importance of reconsidering doubtful authority."
Id. He invited "[t]he legal system [to] find an
appropriate case for [the Supreme] Court to reexamine Qui
l and Be las Hess." Id.
With this legal backdrop, the South Dakota Legislature began
its 2016 session concerned with its ability to maintain state
revenue in the face of increasing Internet sales and their
effect on sales tax collections. Senate Bill 106 was
introduced during the session as: "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.B. 106, 2016 Legis. Assemb., 91st Sess.
(S.D. 2016). The Act provided that any sellers of
"tangible personal property" in South Dakota
without a "physical presence in the state . . . shall
remit" sales tax according to the same procedures as
sellers with "a physical presence[.]" Id.
§ 1. However, the Act limited this obligation to sellers
with "gross revenue" from sales in South Dakota of
over $100, 000 per calendar year or with 200 or more
"separate transactions" in the state within the
same time frame. Id. §§ 1-2. The Act
authorized the State to bring a declaratory judgment action
in circuit court against any person believed to meet the
Act's criteria "to establish that the obligation to
remit sales tax is applicable and valid under state and
federal law." Id. § 2. The Act further
authorized a motion to dismiss or a motion for summary
judgment in the action. Id. It also provided that
the filing of the action "operates as an injunction
during the pendency of the" suit prohibiting the State
from enforcing the Act's obligations. Id. §
3. Other sections of the Act prohibited retroactive
application of the obligation to remit sales tax and made the
obligation prospective only from the date of dissolution or
lifting of an injunction provided for by the Act.
Id. §§ 5-6.
In addition to these provisions, the Act contained an
emergency clause declaring it "necessary for the support
of the state government" and making it effective
"on the first day of the first month" falling at
least fifteen days after signing by the Governor.
Id. § 9. The Act's emergency clause made a
two-thirds majority vote in both houses of the Legislature
necessary for it to pass. S.D. Const. art. III, § 22.
Senate Bill 106 was introduced in the South Dakota Senate and
referred for a hearing by the Senate State Affairs Committee.
S. Journal, 91st Sess., 150 (S.D. 2016). The hearing was held
on February 17, 2016. Id. at 316. Several witnesses
testified in open committee in support of the bill, including
a representative of the Governor's Office. There was no
opposition. Hearing I, supra note 9. The
bill passed out of committee with a do pass recommendation
and was debated and considered on the floor of the Senate on
February 19, 2016. S. Journal at 319, 370. The bill passed
the Senate on a vote of thirty-three yeas and zero nays. S.
Journal at 370.
The bill had its first reading in the South Dakota House of
Representatives on February 22, 2016, and was referred for a
hearing by the House State Affairs Committee. H. Journal,
91st Sess., 621 (S.D. 2016). The hearing was held on February
29, 2016. Id. at 710. Once again, several witnesses
testified in open committee in support of the
bill. Again, there was no opposition.
Hearing II, supra note 10. The bill passed
out of the House committee with a do pass recommendation. H.
Journal at 710. It was debated and considered on the House
floor on March 1, 2016. Id. at 740. The bill passed
by a vote of sixty-four yeas and two nays. Id. The
Governor signed the bill on March 22, 2016. S. Journal at
619. It fulfilled the two-thirds vote requirement for the
emergency clause and took effect on May 1, 2016.
Id.; S.B. 106, § 9.
Shortly after the Governor signed Senate Bill 106 into law,
the South Dakota Department of Revenue began issuing written
notices to sellers it believed met the requirements of Senate
Bill 106. The notices: informed the sellers of the passage of
the law; explained its requirements; advised the sellers to
register for South Dakota sales tax licenses by a date
certain; and warned that the failure to register could result
in a declaratory judgment action as authorized by the law.
Although the three sellers in this appeal, as well as a
fourth seller, Systemax Inc., received notices, they did not
register for sales tax licenses. The State filed a
declaratory judgment action against Sellers in circuit court
on April 28, 2016. The State sought a judicial declaration
that the requirements of Senate Bill 106 were valid and
applicable to Sellers, an order enjoining enforcement of the
law during the pendency of the action, and an injunction
requiring Sellers to register for licenses to collect and
remit sales tax.
Following service of the State's complaint, Systemax Inc.
voluntarily registered for a sales tax license and
immediately began collecting taxes under the law. Therefore,
the State dismissed Systemax from its lawsuit on May 19,
2016. The remaining sellers then sought to remove the
State's action to the United States District Court for
South Dakota on the basis of federal question jurisdiction.
The District Court rejected removal and remanded the case to
the South Dakota circuit court in January 2017.
After the District Court's remand, Sellers filed a joint
answer, motion for summary judgment, and statement of
material facts admitting: each lacked a physical presence in
South Dakota; each met the sales and transaction requirements
for application of Senate Bill 106; and none were registered
to collect South Dakota sales tax. As an affirmative defense,
Sellers raised the unconstitutionality of Senate Bill 106
under the Commerce Clause. The State filed a response to the
motion for summary judgement agreeing with Sellers'
statement of material facts. The State further agreed that
the court would have to grant Sellers' motion for summary
judgment based upon Bellas Hess and Quill
and indicated its intention to pursue review of the issue by
the United States Supreme Court.
The circuit court did not hold a hearing. It entered its
decision based on undisputed statements of material fact and
the parties' briefs. As part of its decision, the court
noted that the parties agreed that no hearing was necessary.
The court found no material issue of fact in dispute over
Sellers' lack of a physical presence in South Dakota.
Observing its obligation to adhere to Supreme Court precedent
prohibiting the imposition of an obligation to collect and
remit sales tax on sellers with no physical presence in the
State, the court granted Sellers' motion for summary
judgment. It enjoined the State from enforcing the obligation
to collect and remit sales tax against Sellers. The State
filed a timely notice of appeal of the court's order
granting summary judgment.
the circuit court erred in granting summary judgment to
We review a summary judgment de novo. Heitmann v. Am.
Fam. Mut. Ins. Co., 2016 S.D. 51, ¶ 8, 883 N.W.2d
506, 508 (citing Ass Kickin Ranch, LLC v. N. Star Mut.
Ins. Co., 2012 S.D. 73, ¶ 7, 822 N.W.2d 724, 726).
We determine whether there are any "genuine issues of
material fact" in the case and "whether the law was
correctly applied." Id. (quoting Ass Kickin
Ranch, 2012 S.D. 73, ¶ 6, 822 N.W.2d at 726). If
there are no genuine issues of material fact, "our
'review is limited to determining whether the [circuit]
court correctly applied the law.'" Id.
Sellers argue that there is an inadequate record for this
Court's review in this matter. But Sellers moved for
summary judgment and by doing so, limited the record
available for review. See SDCL 15-6-56(c) (limiting
the record on a motion for summary judgment to "the
pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if
any[.]"). In any event, the material facts are not in
dispute. The parties agreed that each seller had a principal
place of business outside of South Dakota and each lacked a
physical presence in this state. The parties agreed that in
the previous calendar year, each seller had gross revenue
from the sale of tangible personal property in South Dakota
in excess of $100, 000 and/or sold tangible personal property
in the state in 200 or more separate transactions. The
parties agreed that none of the sellers were registered to
collect South Dakota sales tax.
In view of these undisputed facts and the Supreme Court's
holdings in Be las Hess and Qui l, Senate
Bill 106 could not impose a valid obligation on Sellers to
collect and remit sales tax to this State because none of
them had a physical presence in the state. See Be las
Hess, 386 U.S. at 758-60, 87 S.Ct. at 1392-93 (rejecting
imposition of "the duty of use tax collection and
payment upon a seller" with no physical presence in the
taxing state); Quill, 504 U.S. at 317-18, 112 S.Ct.
at 1916 (reaffirming Be las Hess's Commerce
Clause limitations in rejecting a state's attempt to
require a seller with no physical presence in the state to
collect and pay use tax for goods sold in the state). We see
no distinction between the collection obligations invalidated
in Quil and those imposed by Senate Bill 106, and
hold that the circuit court correctly applied the law when it
granted Sellers' motion for summary judgment.
Nonetheless, the State argues that the Supreme Court should
reconsider Be las Hess and Quill. It claims
that in bringing this suit, the State has accepted Justice
Kennedy's invitation in Direct Marketing for
"[t]he legal system [to] find an appropriate case for
[the Supreme] Court to reexamine" those decisions. __
U.S. at ___, 135 S.Ct. at 1135 (Kennedy, J., concurring).
According to the State, circumstances have changed since
Be las Hess and Quill, making Be las
Hess and Quill outdated. The State emphasizes
that computer technology and software have advanced, South
Dakota has streamlined its revenue laws, and the retail
industry has evolved. The State also claims that the Supreme
Court's application of the physical ...