More Post-Wayfair Thoughts: Sales Tax?

By now, anyone who reads this post should be aware that the Supreme Court decided South Dakota v. Wayfair and overruled its physical presence rule last week. States now have expanded authority to require the collection of their consumption taxes by remote vendors like online retailers. Coverage of the case and its impact on states and vendors has been widespread, including my preliminary thoughts offered on this blog and with Darien Shanske and David Gamage elsewhere.

One aspect of the coverage that would usually drive state tax aficionados crazy is the continued reference to the case as involving sales tax.


For a long time, many of us have smugly corrected folks (often only in our own minds) and noted that it is the state use tax that is at issue when we are talking about online sales. That may be no more.

The South Dakota law that was challenged in Wayfair indeed requires remote vendors to collect the state’s sales tax rather than the state’s use tax. Historically, that would have been a big problem, but it didn’t trouble Justice Kennedy or the other members of the majority. This may require broader thinking than just analyzing what Wayfair means about states’ powers over remote vendors. The Court’s decision in Wayfair may have done much more than just overrule Quill; it may have unsettled some even longer-standing doctrine in this area.

Getting (More) Nerdy With State Taxes

To start, let me back up a bit. When states adopted their sales taxes, they understood that consumers could avoid those taxes by shopping in states where the tax did not apply. States addressed that issue by adopting “compensating use taxes,” which apply when taxpayers use taxable property in the state without having paid the full measure of the state’s sales tax. The sales and use taxes are thus virtually indistinguishable as a matter of substance. In the 1940s, however, the Supreme Court decided two cases that dictated a very formal structure for state sales and use tax systems in the United States.[1]

In those cases, the Court held that states did not have the power to impose sales taxes on out-of-state purchases made by their residents because “to impose a tax on such a transaction would be to project [state] powers beyond its boundaries and to tax an interstate transaction.”[2]. The Court held that states could, however, impose identical use taxes on their residents’ subsequent use of the purchased goods and they could require remote vendors with an in-state nexus to collect those taxes. (The applicable nexus standard for purpose of collecting use tax was the issue in Quill—and its predecessor National Bellas Hess.) Even though the taxes were functionally equivalent, the Court felt that states lacked a required substantive connection with the sale transaction to be able to tax that event. Form mattered.

The result of this formal distinction between taxes is what has led us state tax nerds to get snooty when people talk about sales tax on online sales. We know that states don’t have the power to impose sales taxes on those transactions, because they occur out of state. It is actually the state’s use tax that is at issue. That was, at least, until Wayfair.

When South Dakota adopted its “Kill Quill” bill, it explicitly imposed a sales-tax collection obligation on nonresident vendors rather than a use-tax collection obligation. That would obviously conflict with the precedent noted above, but that issue wasn’t addressed by the Court or by the parties. Everyone was focused on the other big issue-the state’s ability to enforce such a requirement. (Walter Hellerstein has explained this difference between the Court’s treatment of substantive and enforcement jurisdiction in long form.) The closest that the Wayfair Court got to addressing this issue was to say that “[a]ll concede that taxing the sales in question here is lawful.”

That concession may have been generous of the challengers. The distinction between sales and use taxes may seem slim, but it is historically meaningful. South Dakota arguably didn’t have jurisdiction to impose a sales tax on online transactions, even if it had jurisdiction over the remote vendors who make them.

Legal Questions Post Wayfair

I see two major questions that result from this aspect of the Wayfair decision. First, do remote vendors still have a viable claim that South Dakota, and other states imposing similar sales-tax requirements, lack substantive jurisdiction over their sales? Second, as a statutory matter, do states’ laws impose sales tax on transactions with remote vendors (as contrasted with obligations to collect that tax)?

The first seems worth seriously considering. The Wayfair Court did not absolutely approve South Dakota’s law. It merely overruled Quill, and it remanded the case for resolution of other challenges to the state’s imposition. Have Wayfair et al. waived their right to challenge the state’s lack of substantive jurisdiction over its out-of-state sales? Is the General Trading Co. / McCleod formalism still applicable?

On this issue, it is relevant to point out that the Wayfair Court explicitly remarked on the erosion of formalism in its dormant Commerce Clause doctrine and has generally been more permissive of state taxation of interstate commerce. Eliminating the distinction between jurisdiction over sales and use taxes would be consistent with that softened stance, and completely rational, but it would seemingly require a change in the doctrine. Are the arguments against relying on stare decisis of any greater power with regard to McLeod than with respect to Quill? As a practical matter, is it really of consequence since states could just impose use-tax collection obligations?[3]

The second potential legal issue raised by this conflation of sales and use taxes seems similarly intriguing. Do states’ laws actually impose sales tax on remote sales despite the constitutional restriction noted above? For South Dakota, the answer appears to be yes, but in an indirect way.

South Dakota law imposes “a tax upon the privilege of engaging in business as a retailer, a tax of four and one-half percent upon the gross receipts of all sales of tangible personal property consisting of goods, wares, or merchandise, except as otherwise provided in this chapter, sold at retail in the State of South Dakota to consumers or users.” That’s the general state sales tax and that is the tax that South Dakota’s new law requires remote vendors to collect. (Its use tax is imposed in an entirely different Chapter.)

For the state sales tax to apply, then, a sale must be “in the State of South Dakota.” South Dakota law provides a rule for making that determination; retailers are to source the sale of a taxable item to where the item “is received” by the consumer. In general terms, that could be two different places. It could be where the customer actually gets the package in a real sense (i.e., the Amazon package shows up on your doorstep). It could also be where the customer legally gets the package (i.e., the out-of-state transfer of title or possession).

South Dakota statutes do not provide a direct answer to this question, but its administrative regulations fill the gap. As with the statute, sales are sourced to where they are “received.” The term “receive” is defined to mean “the taking possession of tangible personal property.” That definition appears to create a problem for the state because consumers generally take possession out of state through their agents (i.e., the shipping companies).

The regulation turns this on its head, however, and defines the term “receive” to  “not include possession by a shipping company on behalf of the purchaser.” That means that receipt of an online sale generally occurs in-state, the customer’s doorstep.[4]

This result stems from South Dakota being a member of the SSUTA and its destination-based consumption tax structure. (You can find its policy memo on that issue here.) South Dakota’s law thus appears to “work” presuming that the imposition of sales tax on out-of-state sales is now constitutional. The state’s statute imposes sales tax on sales delivered into the state and remote vendors are required to collect that tax (assuming they meet the de minimis thresholds.)

I haven’t reviewed other states’ laws, but this issue should be carefully evaluated by states to ensure that their efforts to take advantage of Wayfair are fruitful.


The use tax is an under-appreciated, base-protective tax. It certainly has not been rendered useless by Wayfair, but it may have been weakened. Regardless of the Wayfair opinion, however, I’d advise states to utilize their use taxes to address the remote-sales issue. Perhaps I’m being overly formal and overprotective of the tax, but this would appear to be the safest path for states unless and until the Court or Congress clarifies the rules.

In the interim, I’ll continue to defend the use tax, but I’ll have to be more reserved. If the Supreme Court can back away from formalism, maybe I can too.


[1] McLeod v. J.E. Dilworth Co., 322 U.S. 349 (1944) (rejecting the application of sales tax to an out-of-state sale); General Trading Co. v. State Tax Comm’n, 322 U.S. 335 (1944) (upholding the imposition of a use-tax-collection requirement on an out-of-state sale).

[2] McLeod, 322 U.S. at 328.

[3] This would obviously matter in the short term for South Dakota, but it is an easy issue to fix in the medium to long term and can be avoided by states that have yet to enact legislation.

[4] To those familiar with the SSUTA sourcing rules, this oversimplifies, but it should suffice for blogging purposes.

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