State v. Wayfair, Inc., 3:16–CV–03019–RAL

Decision Date17 January 2017
Docket Number3:16–CV–03019–RAL
Parties STATE of South Dakota, Plaintiff, v. WAYFAIR, INC.,, Inc., and Newegg, Inc., Defendants.
CourtU.S. District Court — District of South Dakota

Eric F. Citron, Goldstein & Russell, P.C., Bethesda, MD, Richard M. Williams, Kirsten E. Jasper, Attorney General, Andrew Lee Fergel, Department of Revenue, Pierre, SD, Ronald A. Parsons, Jr., Johnson, Janklow, Abdallah, Reiter & Parsons LLP, Sioux Falls, SD, for Plaintiff.

Jeffrey L. Bratkiewicz, Kathryn J. Hoskins, Bangs McCullen Law Firm, Sioux Falls, SD, George S. Isaacson, Martin I. Eisenstein, Matthew P. Schaefer, Brann & Isaacson, Lewiston, ME, for Defendants.



The State of South Dakota sued Defendants Wayfair, Inc.,, Inc., and Newegg, Inc.1 in state circuit court to enforce a new state law requiring the remittance of sales tax on internet sales to South Dakotans by sellers lacking a physical presence within South Dakota. Doc. 1–1. Defendants removed the action to this federal district court alleging federal question jurisdiction. Doc. 1. Plaintiffs filed a Motion to Remand to State Court, Doc. 21, and on the same day, Defendants filed a Motion for Summary Judgment, Doc. 25. Because there is no federal jurisdiction over this state taxation case based on Franchise Tax Board of California v. Construction Laborers Vacation Trust for Southern California , 463 U.S. 1, 103 S.Ct. 2841, 77 L.Ed.2d 420 (1983), this Court remands the case to state court.

I. Background

The Supreme Court in Quill Corp. v. North Dakota , 504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992) reaffirmed the prohibition on states levying a sales and use tax on sales by businesses that lack a physical presence within the state. Echoing its prior decision in National Bellas Hess, Inc. v. Department of Revenue of Illinois , 386 U.S. 753, 87 S.Ct. 1389, 18 L.Ed.2d 505 (1967), the Court in Quill held that while a physical presence was not required under the Due Process Clause when seeking to impose a duty to collect a state use tax, a physical presence was required to avoid a violation of the "negative" or "dormant" Commerce Clause's substantial nexus requirements. Quill , 504 U.S. at 312, 112 S.Ct. 1904. Based on stare decisis, Quill , though decided well before the internet-sales boom, acknowledged the fading distinctions between direct and indirect taxes perpetuated by formalism and drafting. Quill , 504 U.S. at 311, 112 S.Ct. 1904 ("[C]ontemporary Commerce Clause jurisprudence might not dictate the same result were the issue to arise for the first time today."). Recently, in Direct Marketing Ass'n v. Brohl , ––– U.S. ––––, 135 S.Ct. 1124, 191 L.Ed.2d 97 (2015), the Supreme Court decided a case touching on Bellas Hess , Quill , and the dispute at issue here. Acknowledging the precedent of Quill , the state of Colorado passed a law requiring consumers themselves to fill out a return and remit taxes to the state on items purchased online from sellers who do not collect state sales and use taxes; retailers were responsible for notifying consumers of the self-reporting and taxation requirements. Brohl , 135 S.Ct. at 1127–28. In discussing the Colorado tax law, the majority acknowledged the internet's impact on state revenues, but as it was not within the gambit of the question presented, did not discuss the idea that Quill was wrongly decided or outdated. Id. Justice Kennedy's concurrence, however, focused on the need to reevaluate Quill in light of "changes in technology and consumer sophistication." Id. at 1135 (Kennedy, J., concurring). Justice Kennedy wrote that "[t]he legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess ." Id.

Justice Kennedy's concurrence in Brohl spurred quick action from the State of South Dakota. During the 2016 Legislative Session, the South Dakota Legislature passed Senate Bill 106, "An Act to provide for the collection of sales taxes from certain remote sellers." S.B. 106, 2016 Leg., 91st Sess. (S.D. 2016). This bill requires that certain out-of-state sellers comply with South Dakota's sales tax laws "as if the seller had a physical presence in the state." S.B. 106 § 1. The law excludes sellers that did not exceed $100,000 in gross revenue from sales within South Dakota, or did not have more than two hundred separate transactions within the state in the prior calendar year or year to date. S.B. 106 § 1(1)(2). The law directs the State to bring a declaratory judgment action to establish that the requirement that out-of-state sellers remit sales tax to the State is valid under state and federal law.

S.B. 106 § 2. The filing of such a declaratory judgment action operates as an injunction from enforcing the remittance of sales tax under Section 1 of the Act. S.B. § 3. The Legislature included in S.B. 106 eleven specific legislative findings, targeting without name Quill , which prohibits the tax plan established in the Act. S.B. 106 § 8. These findings outline the loss of revenue South Dakota experiences from online-only sales that are not subject to state taxes, the ease with which retailers could adapt to the new taxation scheme, and Justice Kennedy's call in his concurrence to Brohl that the Quill doctrine should be reconsidered. S.B. 106 § 8 (1), (6), (7). Governor Dennis Daugaard signed S.B. 106 into law on March 22, 2016, making it effective on May 1, 2016. See S.B. 106 § 9.

The South Dakota Department of Revenue sent individualized notices to 206 sellers it identified as meeting the statutory requirements of S.B. 106 on or about March 25, 2016. Doc. 1–1 at 16. The notice required the sellers to register for a license to collect and remit state sales tax by April 25, 2016. Doc. 1–1 at 16–17; see also Doc. 1–1 at 33–37. On April 28, 2016,2 the State initiated a state court suit against four non-registered companies, Wayfair, Inc., Systemax, Inc.,, Inc., and Newegg, Inc., under the Act's provisions. Doc. 1–1. In its complaint, the State "recognizes that a change in federal constitutional doctrine will be necessary for the State to prevail in this case." Doc. 1–1 at 23. The State's complaint includes numerous references to Bellas Hess and Quill , and many of the Legislature's findings. Doc. 1–1 at 6–7, 18. The prayer for relief requests that "the Court declare that the requirements of section 1 of the Act are valid" and that "the Court enter an injunction requiring the defendants to register for a license to collect and remit the sales tax." Doc. 1–1 at 23–24. Upon receiving the State's complaint, Systemax, Inc. voluntarily agreed to register with the Department of Revenue to remit taxes under the Act, and was then dismissed from the lawsuit. See Doc. 1 at 2.

Wayfair, Inc.,, Inc., and Newegg, Inc. filed a notice of removal in the District of South Dakota, Central Division. Doc. 1. The notice of removal alleges a question of federal law to support jurisdiction under 28 U.S.C. § 1331 by pointing to the State's declaratory judgment action seeking S.B. 106's constitutional validity, and the State's acknowledgement that a change in "federal constitutional doctrine" is required before the State can prevail. Doc. 1 at 3. The State filed a Motion to Remand to State Court, Doc. 21, and on the same day the Defendants filed a Motion for Summary Judgment, Doc. 25. The State concedes in its briefing that the Defendants' Motion for Summary Judgement should be granted, but by the state court after remand. Doc, 27 at 16. The Defendants oppose the State's Motion to Remand. Doc. 26. This Court held a hearing on the pending motions on December 8, 2016. Doc. 36.

II. Federal Question Jurisdiction

Subject matter jurisdiction, including upon removal, is an issue that can be raised at any time, either on motion of the parties or by the court itself, and cannot be forfeited or waived. 28 U.S.C. § 1447(c) ; United States v. Cotton , 535 U.S. 625, 630, 122 S.Ct. 1781, 152 L.Ed.2d 860 (2002) ; Ruhrgas AG v. Marathon Oil Co. , 526 U.S. 574, 583, 119 S.Ct. 1563, 143 L.Ed.2d 760 (1999). A case may only be removed to federal court where the federal court would have had original jurisdiction. 28 U.S.C. § 1441(a) ; Caterpillar Inc. v. Williams , 482 U.S. 386, 392, 107 S.Ct. 2425, 96 L.Ed.2d 318 (1987) (identifying diversity of citizenship or federal question jurisdiction as two ways to file in federal court). The defendant removing the case from state to federal court bears the burden of proving that the removal was proper, and federal subject matter jurisdiction exists. In re Business Men's Assurance Co. of Am. , 992 F.2d 181, 183 (8th Cir. 1993) (per curiam). "A defendant generally is required to cite the proper statutory basis for removal and to allege facts from which a district court may determine whether removal jurisdiction exists." Pet Quarters, Inc. v. Depository Tr. & Clearing Corp. , 559 F.3d 772, 778 (8th Cir. 2009). However, federal courts have a "virtually unflagging" obligation to hear and decide cases within federal jurisdiction. Colo. River Water Conserv. Dist. v. United States , 424 U.S. 800, 817, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976) ; see also Sprint Commc'ns, Inc. v. Jacobs , ––– U.S. ––––, 134 S.Ct. 584, 590–91, 187 L.Ed.2d 505 (2013).

Under federal question jurisdiction, "[t]he district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States." 28 U.S.C. § 1331. A majority of cases brought under federal question jurisdiction involve a cause of action that is created by federal law. See Am. Well Works Co. v. Layne & Bowler Co. , 241 U.S. 257, 260, 36 S.Ct. 585, 60 L.Ed. 987 (1916) (establishing Justice Holmes' early conception of federal question jurisdiction). These cases easily satisfy the "well-pleaded complaint" rule, which requires that...

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