Sou⁠t⁠h Dako⁠t⁠a v. Wayfa⁠i⁠r, Inc.

By: The James Madison Institute / 2018



South Dakota v. Wayfair, Inc.

By Vittorio Nastasi

The advent of the internet and the modern digital age has been a catalyst for innovation and exchange across the world. Consumers have access to a wider variety of goods at a lower cost than ever before, and for the first time, local businesses have access to national markets. Businesses that would otherwise not be feasible are thriving as artisans, stay-at-home moms, and young people entering the online marketplace. Unequivocally, the internet has reduced barriers to exchange and contributed to economic growth. In fact, new business formation increased by nearly 20 percent between 1994 and 2005[1]. However, our laws have not kept pace with the rate of technological progress. As we have observed in debates over online harassment, intellectual property law, and the regulation of social media, the internet remains an unsettled frontier. In the absence of legislative action, the Supreme Court has repeatedly entered the fray. The Court’s recent ruling in Wayfair v. South Dakota marked a shift in jurisprudence surrounding interstate commerce, and will have significant repercussions for consumers and online retailers.

In 2016, the South Dakota State Legislature passed a bill that required out-of-state online retailers to remit sales tax on online purchases. This action was in conflict with previous Supreme Court rulings––most notably Quill Corp. v. North Dakota and National Bellas Hess Inc. v. Illinois Department of Revenue[2]. In Bellas Hess, the Court ruled it to be unlawful for a state to compel sellers with no physical presence in the state to collect state use taxes. The majority cited the Commerce Clause and the Due Process Clause of the 14th Amendment in their opinion. The court partially overturned this decision in Quill, reasoning that the Quill Corporation had a sufficient presence in the state. The Court maintained, however, that the Commerce Clause prohibited states from levying sales taxes on businesses without a physical presence in the state. This partial concession all but invited the challenge initiated by the South Dakota Legislature.

The 5-4 decision overturned the Court’s previous rulings in Quill and Bellas Hess. Furthermore, the Court’s decision eliminated the physical presence rule. Significant business activity is now a sufficient proxy for a substantial nexus in the absence of a physical presence. For traditional retailers, the decision corrects a longstanding and unfair loophole that gives online retailers an advantage. The decision is also a victory for states who stand to benefit from a windfall of tax revenue from online sales. In their case, the State of South Dakota argued that the movement to online shopping was depleting state tax revenue, and that states are constitutionally permitted to levy their own taxes[3]. Constitutionally, the Court’s ruling is sound, but it may also foist significant burden onto small business with an online presence.

States are likely to alter their tax codes to take advantage of this change in Federal policy, but the monetary cost of these taxes is not the primary concern. Each state has the proper Constitutional authority to set their own standards and tax rates. For example, the South Dakota law that triggered the Court’s action only requires that businesses with more than $100,000 in sales within the state remit taxes. In fact, thirty-one states have passed laws requiring internet sellers to remit taxes without a physical presence in the state, but many of these policies cannot be implemented without further clarification from the courts[4]. The larger problem imposed by the Court’s ruling is compliance. Each of these states has different standards and thresholds for establishing taxation. Large online retailers like Amazon will have no trouble complying with any new taxes. However, many small business lack the resources to learn the tax code in each state, monitor the origin of purchases, and remit taxes appropriately. These compliance issues serve as barriers to interstate commerce––the exact problem the Commerce Clause is meant to avoid. The Court’s decision found that significant business activity constitutes a substantial nexus, but failed to provide a clear threshold for significant business activity. The South Dakota law at issue defines $100,000 in annual sales within the state as a substantial nexus, but there is no standard. Congress should act to protect small businesses from this undue burden, and establish a minimum threshold level of sales. Alternatively, the Remote Transactions Parity Act (RTPA) would allow states to collect taxes on sales to residents with a physical presence in the state conditional on simplification of the state’s tax code4. However they choose to act, Congress alone has the power to preserve the freedom, innovation, and economic potential of the internet.

Vittorio Nastasi is an intern with the James Madison Institute. He is a senior at Florida State University studying Economics and Political Science with minors in Statistics and Urban & Regional Planning.




[1] Bureau of Labor Statistics: Entrepreneurship and the US Economy available at

[2] Oyez: South Dakota v. Wayfair, inc. available at

[3] SCOTUS Blog: South Dakota v. Wayfair, inc. available at

[4] Tax Foundation: Should Congress Act Before SCOTUS on Online Sales Taxes? Available at