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December 20, 2022 The Tax Lawyer

A Requiem for the Physical Presence Rule: Deconstructing and Refuting South Dakota v. Wayfair, Inc.

Vol. 76, No. 1 - Fall 2022

by Eric Smith


South Dakota v. Wayfair exemplifies a truism of Supreme Court decisions: they can be overruled, but they cannot be freely undone. No matter how sincere Justice Kennedy’s desire was to correct perceived error in Quill v. North Dakota’s physical presence rule, and ameliorate its “egregious and harmful” effect on the States since the inception of the online marketplace, there was a toll for reneging. This article suggests that on balance, the harm exceeded the benefits from overruling Quill.

The toll was high. Wayfair left small online businesses in the lurch to manage compliance with the country’s 10,000-plus state and local taxing jurisdictions. Wayfair left reliance interests in tatters and implied that private parties ought to anticipate the Court’s overrulings and that there are circumstances where reliance upon a square, unabandoned holding of the Supreme Court is not justifiable. Significantly, the Court’s credibility was sacrificed in Wayfair, and gave private parties reason not to take the Supreme Court at its word. That sacrifice nudged the Constitution closer to being nothing more than what five justices say it is. Post-Wayfair, uncertainty abounds, with a much less than clearly defined economic presence rule supplanting the physical presence rule, making it more onerous for small online businesses to flourish.

The benefit from Wayfair is that States, lack of physical presence notwithstanding, can now expect to compel out-of-state retailers to collect their sales and use tax. This victory is diminished, however, given that the largest online retailer by many orders of magnitude, Amazon, began collecting in all States in April, 2017, over a year before Wayfair was handed down. Had the Court meaningfully considered Amazon’s capitulation and left the physical presence rule intact, it could have emerged as a crucial protection for small online businesses, even while State coffers were substantially replenished. 

Wayfair, further, represents an ends-driven analysis that bears significant weaknesses when subject to scrutiny. Justice Kennedy employed an avantgarde standard of review, seemingly cut from whole cloth. His justification for bypassing stare decisis was at best wish-washy and at worst calamitous for those who expect the current Court to respect prior Court decisions. Justice Kennedy’s reformulation of the relevant Commerce Clause analysis impetuously blends due process and Commerce Clause principles, leaving waters surrounding the question murky and unsettled. This article highlights Wayfair’s weaknesses and shortcomings and serves as a roadmap to challenge the decision.

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