Courthouse Steps: South Dakota v. Wayfair, Inc. Decided

Litigation & Federalism and Separation of Powers Practice Groups Teleforum

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The Dormant Commerce Clause of the Constitution prohibits states from imposing excessive burdens on interstate commerce without congressional approval. Consistent with this doctrine, in 1967, the Supreme Court held that a state cannot require an out-of-state seller with no physical presence in that state to collect and revoke taxes for goods sold or shipped into the state. The Court affirmed this holding in 1992 and 2015. However, in 2015, Justice Kennedy wrote a concurring opinion asking whether the Court should continue following precedent in light of additional dormant Commerce Clause cases and the recent significant technological and social changes that affect interstate commerce.

In 2016, the South Dakota Legislature passed a law requiring sellers of “tangible personal property” who do not have a physical presence in the state to remit sales tax according to the same procedures as sellers who do have a physical presence. The act limited the obligation to sellers with gross revenue from sales in South Dakota over $100,000, or 200 or more separate transactions, within one year.

The legislation's stated purpose was to help the state maintain revenue in the face of growing internet sales and a decrease in sales tax collections.

Following the passage of the law, South Dakota sued many retailers who failed to comply. The state courts of South Dakota ruled for the retailers, considering themselves “duty bound to follow” the previous Supreme Court rulings. On June 21, the Supreme Court ruled in favor of South Dakota in a 5-4 decision authored by Justice Kennedy.


Dr. John S. Baker, Jr., Visiting Professor, Georgetown Law


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Event Transcript

Operator:                                 Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society's Litigation & Federalism and Separation of Powers Practice Groups, was recorded on Wednesday, June 27, 2018 during a live Courthouse Steps teleforum conference call held exclusively for Federalist Society members.        


Mr. Wesley Hodges:               Welcome to The Federalist Society's teleforum conference call. This afternoon, our topic is a Courthouse Steps discussion on the Supreme Court's decision in South Dakota v. Wayfair Inc. My name is Wesley Hodges and I'm the Associate Director of Practice Groups at The Federalist Society.  


                                                As always, please note that all expressions of opinion are those of the expert on today's call.


                                                Today, we are very fortunate to have with us Dr. John Baker, who is a visiting professor at the Georgetown Law School and professor emeritus at LSU. After our speaker gives his remarks today, we will move to an audience Q&A. So please keep in mind what questions you have for Dr. Baker or for the case in general. Thank you very much for speaking with us today, Dr. Baker. The floor is yours.


Dr. John S. Baker:                   Thank you, Wes. And to the audience, I assume that virtually everybody knows something about the case from headlines that they would've seen or heard on television. I want to start the forward with two headlines. Uh, the first one came out from Reuters, and it said, "U.S. States Set to Gain Billions in Sales Taxes after Court Ruling."


                                                Well, uh, my reaction to that is don't include it in the budget just yet. Why? Well, when you read section five of the opinion you'll see that there may be still other issues to be raised in this case. The case has been remanded and in the opinion refers in fact to their -- the possibly of other dormant commerce clause related issues.


                                                The second, uh, comes from Lexus 360's publication, and it says that "Congress [Is] Not off the Hook" after the case. Well, Congress is probably going to have to weigh in on this whether they want to or not. And that's not my notion. That notion comes from Representative Kristi Noem, Republican from South Dakota, who is now the Republican nominee for governor there. She sat on the -- or sits on the House Ways and Means Committee and she introduced the bill and tried to push it during the spring to try to have Congress enact it—a bill regarding the ability of States to impose taxes. Well, why would she do that? Why would she do that?


                                                Well, as she recognized, if the Supreme Court, she said in January, if they ruled in South Dakota's favor, there is going to be a free-for-all among the States. And I think that's what in fact is going to happen. More about that as we go along.


                                                So back to the first point in terms of actually what the decision is. The holding is very specific, that is it goes to a couple of cases, Quill most recently, but also to a previous case called Bellas Hess. And what the Court was dealing with is the responsibility or not of out-of-state sellers to collect taxes that are due on sales when goods go into a state. The Quill case came up in 1992, and at that point, there was not much of any internet traffic. They were dealing really with mail-order houses, and they took the position following, uh, Bellas Hess that you had to be -- have an in-state presence before a state could force you to actually collect the tax. In fact, Quill overturned part of Bellas Hess, having to do with the due process clause. But it left standing this requirement from Bellas Hess in terms of physical presence in the state when it comes to taxation.


                                                That was the point in this case and as a result of this case, the clear ruling is that physical presence under the dormant commerce clause is not necessary for a state to force an out-of-state tax, uh, seller to collect taxes. That overruled Quill and it overruled, uh, National Bellas Hess.


                                                Now, the lineup of the justices in the case was rather interesting because the opinion is written is written by Justice Kennedy and along with him are Justices Ginsburg, Gorsuch, Alito, and Thomas. On the other side, Chief Justice Roberts writes the opinion dissenting. What's interesting is that nobody defends the actual ruling in Quill in terms of what it should've been originally. That is even Roberts says it's wrongly decided, and his defense of Quill is largely almost exclusively, yeah, on terms of stare decisis and the impact that it will have on the markets possibly. And that these issues are more properly left to Congress.


                                                Justice Kennedy goes through various elements. And it's not unexpected from him because prior to this case—and the reason this case comes up—is because Justice Kennedy had previously expressed the opinion that Quill needed to be reexamined and overruled. In a case from ni-, uh, 2015 Direct Marketing Association v. Brohl, he said that Quill needed to be readdressed and it needed to be changed. And that opinion came from a lower court case of the same name in which then Judge Gorsuch concurring in the result, wanted the High Court to reexamine Quill, again disagreeing with Quill.


                                                So with the expectation that both of those justices would rule against Quill, and they did, there was a lot of expectation that South Dakota would win this case. How they win it is interesting, as I've already noted in terms of the case going back. But the opinion by Justice Kennedy is a mix of heavy policy and his understanding, which I think in part is questionable, regarding the dormant commerce clause.


                                                He starts out by talking about how impractical it is for States to actually collect sales-and-use taxes on their citizens who buy things from out of state. A number of questions were assumed, and they're assumed based on cases that is clearly permissible for a state to collect taxes against an out-of-state seller because in Complete Auto Zone, they upheld the ability to do that in certain stanc-, certain circumstances.


                                                The question becomes who has the responsibility? The assumption is that the point of sale is not out of state, but the point of sale's actually in the state. None of these questions were really gone into. There was so much in the case to begin with, you wouldn’t have gone back there, but my point at, at this juncture is to simply note that this opinion is layered on a, a series of cases regarding the dormant commerce clause, and that to me is important because at the end, Justices Gorsuch and Thomas, although the concur in the opinion and they sign under the opinion, fundamentally, they appear still to be in complete disagreement with what the dormant commerce clause jurisdiction has been.


                                                The opinion goes on to talk about the purpose of, of the commerce clause—anti-balkanization—and notes that the Congress has to the Court largely to set up the rules. Well, that's true, but in large part, the Court sees that opportunity and the Congress never shy about shirking work, has let the Court do so largely.


                                                The interesting thing about his history is that Justice Gorsuch makes a point of saying he doesn't necessary agree with that history.


                                                A main point is that the principle under the commerce clause—uh, meaning the dormant commerce clause, even though he says com-, commerce clause—is that what States do cannot in any way discriminate, and they cannot, uh, do things that would violate or burden interstate commerce. One note here is that it may be that the tax qu-, question and the dormant commerce clause question are actually inverted. More about that later when I get back to Justice Thomas.


                                                Anyway, they go back to a 1977 case, which came after Bellas Hess. This is called Complete Auto and I mentioned already that the Court had said that States could, in fact, tax interstate commerce as long as they didn't violate these principles. And Bellas Hess was decided before that case. So in Quill, the issue was did Complete Auto effectively gut Bellas Hess?  In Quill, the Court did say that physical presence isn't necessary in order to satisfy due process. But based on Bellas Hess, kept in place the rule that physical presence was necessary under the dormant commerce clause.


                                                Then the opinion goes into all the flaws it finds in Quill.  It finds that it is inconsistent with Complete Auto. Well, that was true at the time. What's changed? What's mostly changed is it seems to be their assessment of the change in the marketplace. Well, certainly, sales over the internet have greatly changed the market, and brick-and-mortar operations are complaining a great deal about this.


                                                But there is a dispute between the majority opinion and Robert's as to how that is playing out. Amazon is used as an example by both of them. Amazon benefited from the lack of taxes being imposed on it early on. Now, it supports it. Why? Well, it's having to pay taxes because it's in most states anyway and has volunteered to pay taxes or collect taxes in some other jurisdictions. In any event, there is an argument as between the two as, as to what the real impact is.


                                                I mention this because this seems like a classic, legislative question that the Court is ill-equipped to figure out what in fact is the truth on this.


                                                The last point in this section by Justice Kennedy has to do with respecting fe-, federalism and free markets. I almost had a laugh at that because if anything, the opinion and the development of the dormant commerce clause has in many ways distorted a kind of federalism as the Framers understood it. Where it has allowed States to go beyond their boundaries and to go into other states and have an effect there. And that's what's happening when you can impose any obligation from one state to another. I'm not saying that such obligations shouldn't be imposed. But clearly the Framers intended that to be done by Congress, not by individual states.


                                                That's why when Representative Noem says there's going to be a free-for-all, that's exactly what the Framers were working against in the way they created the -- not only the commerce clause, but various other aspects of the Constitution so that these commerce questions would be decided by the Congress. Remember, the Constitutional Convention grows out of the failed convention or meeting in Annapolis to deal with the problems of commerce. The States have often been a problem in terms of interfering with other states and that's what the Constitution was trying to correct in moving from a confederation to the Constitution that we have.


                                                Regarding stare decisis, the Court does not find that compelling. Uh, you can argue about that, but, uh, certainly in this case, it wasn't compelling. In all the [indiscernible 13:57] on it emphasizing the realities of commerce and Justice Kennedy seems to think that he has understood better than possibly Congress might be able to, what the realities of commerce are.


                                                I've mentioned a couple of times that Justices Thomas and Gorsuch, uh, join the opinion and then separately concur. And in the concurrence by Justice Gorsuch, who along with Kennedy, as I said, triggered this whole thing by their previous statements, he says the following, and I want to read this: "My agreement with the Court’s discussion of the history of our dormant commerce clause jurisprudence, however, should not be mistaken for agreement with all aspects of the doctrine." And then, further in his short concurrence, he notes that, uh, he notes that there have been challenges to this, citing Justice Scalia's dissent, um, in Comptroller v. Treasury of Maryland and most notably, it seems to me Justice Thomas' dissent in Camp-, Camps Newfound—and I'll probably mispronounce this—Owatonna v. Town of Harrison. In fact, it was that opinion in which Justice Thomas said that really the only limitation on the States is the import and export tax provision, which prevents them from imposing taxes that are on commerce among the States. That position has never been accepted, but that Gorsuch would mention it and that Thomas doesn't mention is, but clearly hasn’t abandoned it is interesting for reasons that I'll mention in the next section.


                                                For the first -- or, for the second of the two headlines that I read, I mentioned that Congress is going to have to deal with this as Representative Noem has mentioned. But there's more reason to believe that they'll have to for other reasons. That is…I actually filed, uh, an amicus on behalf of myself in this case and it's an issue not addressed and that is the Import-Export Clause. Even if you don’t agree with Justice Thomas that it applies internally within the country, it clearly does apply to taxing goods coming from out of the country unless they land somewhere first, and I go through the, the scant jurisprudence on this. But if, if that clause means anything, it would seem to apply to internet sales that are contracted outside of the country and come in to the country.


                                                Now, the South Dakota law on its face, clearly applies to internet sales anywhere on the internet. There's no limitation to the States themselves. And under the constitutional provision, States cannot do that. They're barred unless they have the permission of Congress. So South Dakota could, maybe the Supreme Court would—I would urge them to do so—is to construe the law in such a way as to say that as, as applied to sales from abroad, it can't be applicable.


                                                There's also a practical reason why it can't be applicable. What's that? Well, the way that South Dakota pro-, proposes to enforce this is by issuing -- filing a declaratory judgment act against the out-of-state seller, forcing that person, or company, to, in fact, collect the taxes. Well, you might be able to get away with that in the United States. But take a seller in Canada. How are you going to force that party even in the court? You get a default judgment. Is Canada going to enforce it?


                                                These are questions that the Framers would well have understood, but so far have not been addressed in this case. The legislation that I think will be necessary, as Representative Noem thinks will be necessary, will be interesting when you look at two things. One, President Trump was all in favor of this decision. But what happens when you're faced with the possibility of two things: if you don’t apply this tax to sellers from out of the country, you give an encouragement to internet companies to set up offshore. That goes against his whole notion about bringing jobs back home. Two, one of the things that Trump complains about with regard to the European Union is that their value-added tax is a trade barrier. And Europe is pretty good at enforcing collection of that against out-of-EU, um, internet sellers.


                                                So it will be very much in his interest, it would seem to me, to want to enforce taxes versus out-of-country sellers, possibly, in order to avoid having jobs loss. And also to use it as a weapon against the European Union and trade talks.


                                                I think we have to keep that in mind as long as Trump is there. But if Trump's not there, what if you have a democratic president and a democratic legislature? Can you imagine that any Congress—much less a democratic Congress—is simply going to allow all of this money that it has to approve to flow to the States? Aren't they going to take their cut? I predict -- I won't predict, but I would say the odds of a national value-added tax, tax, VAT, have gone up as a result of this decision.


                                                Now, if you think that is the way to go as far as federalism is concerned, uh, I think there're a lot of people who, valuing federalism, would not be in favor of a national, value-added tax. At the beginning, one of the main concerns of the States with regard to the Federal Government was that they would suck up all the tax money. And it's done a pretty good job of that since the 16th Amendment. It'll be very interesting to see what happens with this, but as I said at the beginning, before the States go budgeting all of these taxes they expect to collect, they might want to wait just a little bit.


                                                Thank you, and, Wes, I'm open to questions.


Mr. Wesley Hodges:               Excellent. Thank you, Dr. Baker. Let's go and move to audience questions. In a moment, you'll hear a prompt indicating the floor mode has been turned on. In order to ask your question, enter the star key and pound key on your telephone. We'll answer all questions in the order in which they are received.


                                                Again, if you'd like to ask a question, either regarding this case directly to Dr. Baker, just enter the star key and pound key on your telephone.


                                                Looks like we do have one question out of the gates. Let's go ahead and move to our first caller.


Mr. Mark Casso:                     Yes, thank you. This Mark Casso with the Construction Industry Round Table. Uh, Dr. Baker, I presume these taxes are going to apply to service or-, service providers that are out of state. For example, architects, engineers, designers are often not in the state of the project that their working on, but their designs are used.


Dr. John S. Baker:                   Right. No, it, it covers services too,


Mr. Mark Casso:                     So, so they would have to -- so those designers would then have to somehow determine what the tax was on their service from a given state, in this case South Dakota?


Dr. John S. Baker:                   Right. And, and that means that in states that have no taxes on those services, they're going to now have taxes on those services.


Mr. Mark Casso:                     Yeah.


Dr. John S. Baker:                   So it's going to be a mess. It going to be a complete mess and that's what people don’t realize.


Mr. Mark Casso:                     Yeah. And it also strikers me, if I may have a fo-, a quick follow up, uh, I think there's another caveat to your caution to about States thinking they're going to collect a lot. Um, if, if the taxes collected in the state now of South Dakota and not in the home st-, I don't presume they're going to double tax them? I mean at some point, uh, merchants are going to say, "Well, I already paid the tax on that, uh, service or that product and it's in the state it was sold in." It's not -- I don’t see how they're double -- going to double ta-, I mean it's just going to split the taxes up into multiple states. Uh, uh, I think it's a net, net gain in some respects.


Dr. John S. Baker:                   It is. And as Roberts pointed out, the laws of taxes, at least in one study, the laws of taxes to states has been reduced from what it was initially.


                                                Look, this is all part of the, of the result of a series of cases in the Supreme Court in which they view as the due process clause, first of all, to undermine federalism. Federalism gave hard boundaries to the States and said the States, you can't move outside of the boundaries unless Congress permits you to do so. And the Court said -- and they began this in the, um, in the long-arm statute cases. We need long-arm statutes, but they shouldn't be state long-arm statutes. They need to be a federal long-arm statute.


                                                Anyway, they, they built this up on the notion that, that, that tax can be imposed on a transaction that occurs in another state. I think that's fundamentally wrong. And it's going to lead to the problems that you've, you've indicated. Now, what Representative Noem wants is, uh, allowing the States to tax if they agree to simplifying their taxing. Well, that's going to change the structure of government in a lot of places because with taxing power goes power. And it was noted that there are 10,000 different taxing jurisdiction in the United States. It will mean more control by Congress over the States in how they do things.


Mr. Wesley Hodges:               Thank you very much, caller, for your question. Looks like we do have another question in the queue. Let's go ahead and move to our second caller.


Ms. Gina Dougherty:              Hi, this is Gina Dougherty, and I previously worked for the Department of Finance and Administration, uh, in Arkansas. And I had a follow up on Dr. Baker's statement, um, about services being, um, taxable in the receiving state, the state of where the customer receives it because, um, I, I, I think that, you know, it's going to apply to services in a state that taxes that service. States don’t tax all services. Some states tax a few, some states tax all as a generality. Other states pick and choose between those taxes. So I think it's a little too broad to say that it would apply to all services 'cause it's going to depend on what the state tax is. Uh, any of this. You know, there are a variety of exemptions for different products in different states. It doesn't make it easy, but it, it's certainly not a generality. And that should be my comment.


Dr. John S. Baker:                   Well, I think you've missed something here. The point is that even if you don’t tax services in Arkansas, South Dakota is taxing services that are rendered in Arkansas to a resident of South Dakota. That's the point.


Mr. Wesley Hodges:               Thank you, caller, for your question. Uh, Dr. Baker, it looks like there are no current questions in the queue. However, um, we, I guess, are aware that there's been an announcement from the Supreme Court.


Dr. John S. Baker:                   Yes, we anticipated that.


Mr. Wesley Hodges:               Uh, do, do you have any comment on it, uh, I guess as --


Dr. John S. Baker:                   -- I don't know what the announcement was. I've been talking.


Mr. Wesley Hodges:               Oh, sorry. Uh, we have an announcement that, uh, Justice Kennedy is, uh, planning to retire.


Dr. John S. Baker:                   Well, as I told you, if that was the news that I would be jumping up and down for joy. Uh, so, yes I am very happy about it.


                                                Uh, okay. Then I'll make this additional comment. As of last night when I was rereading Justice Thomas' opinion, and I could not figure out why he joined an opinion that he absolutely disagreed with, it came to me, this is his going-away present to Justice Kennedy that it will not be a 4-1-1 decision, but will give him a majority. So what timing?


                                                Anyway, Wes, if we don't have any other questions, I want to go watch the television as well as everybody else.


Mr. Wesley Hodges:               Wonderful. Well, the queue is open. I'll give everyone just one more chance. If you'd like to present a question, just enter the star key and pound key on your telephone.


                                                While we wait for any questions, I do want to let everyone know that we do have another teleforum planned for today, and it's on Janus. And that's be at 3:30 Eastern Time, uh, and we invite you to join us for that as well in just about an hour.


                                                Looks like we do have one question in the queue, uh, Dr. Baker if we can hold off from the television, let's go ahead and move to that caller.


Mr. Phil Seversen [sp]:           Hi Dr. Baker. This is Phil Seversen. I'm sorry I joined late, but I was -- my question was, um, sort of a practicality question regarding, um, the ability of, um, uh, software and technology to solve some of the practical problems in terms of implementing this and, and how that might, uh, effect whatever congressional, uh, response comes to the, uh, comes to the case? And I'm sorry if you've already discussed that, but --


Dr. John S. Baker:                   -- No, no it's fine.


Mr. Phil Seversen:                   Ok.


Dr. John S. Baker:                   The question of software was, was certainly a big part of the debate. And the, um, South Dakota claimed, as did others, that the technology is such that it is quote, "easy." Um, there is a dispute on that in the dissent. I mean, I can't resolve that. And -- but even the majority said that technology going forward would be able to solve some of these problems that might be faced by small businesses. It also left open the possibility that even though they were approving a clear nexus as to these large, online sellers that small, online sellers might have in fact have a, have a different case that could be, um, claimed as against the dormant commerce clause. The different -- the difficultly for small businessmen, or women, in this case is that South Dakota has a rather high threshold. In other words, they have a threshold to protect smaller businesses not having to, um, comply with this until they hit a certain gross-sales amount or a number of transactions per year—I think it's 200. And then they hit that, then they're liable.


                                                So, um, there's some attention paid to that, but also recognition that technology's going to have to do more. Representative Noem's point was that there had to be simplification and, and that's where I go back to the congressional issue: who's going to simplify it? I mean, the Court can't do that. Only Congress is going to be able to do that.


Mr. Phil Seversen:                   Thank you.


Mr. Wesley Hodges:               Thank you, caller. The queue is empty again so this is probably your last chance if you'd like to present a question for this call, enter the star key and pound key on your telephone. Seeing no immediate questions, Dr. Baker, do you have any last thoughts for the call?


Dr. John S. Baker:                   No, no. Thank you, Wes. Thank you, uh, for doing this, um, and I'm going off to watch the television. Thank you.


Mr. Wesley Hodges:               Excellent. Excellent. And on behalf of The Federalist Society, I would like to thank you for the benefit of your valuable time and expertise today. We welcome all listener feedback by email at Thank you all for joining us. This call is now adjourned.


Operator:                                 Thank you for listening. We hope you enjoyed this practice group podcast. For materials related to this podcast and other Federalist Society multimedia, please visit The Federalist Society's website at


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South Dakota v. Wayfair