By now you’ve probably heard about the supreme Court decision in South Dakota v. Wayfair, Inc. and how states can now collect sales tax from businesses outside their border.  After reading the court’s opinion, I wanted to take some time to discuss the good, the bad, and the ugly I found inside.

Forget most of what you’ve heard from the talking heads. The court found that the physical presence rule it had established 50 years ago in Quill Corp. v. North Dakota was unsound, and here’s why:  According to the court, “State regulations may not discriminate against interstate commerce; and States may not impose undue burdens on interstate commerce.”  Also, for state taxes to be valid, it must “(1) apply to an activity with a substantial nexus with the taxing State, (2) are fairly apportioned, (3) do not discriminate against interstate commerce, and (4) are fairly related to the services the State provides.”

States and local taxing authorities have been complaining about the physical presence rule, probably since it was first decided in National Bellas Hess v. Department of Revenue.  I’ve had talks with my own state representative about it.   However, when I look into the details, I wonder what people are talking about.  According to the supreme Court, state regulations may not “impose undue burdens on interstate commerce”.  That makes me curious. If the court does not believe having to understand and follow the laws, not to mention report and remit to 10,000 or more different taxing authorities, is  an undue burden on interstate commerce, what is?  Let’s face it, most of the large retailers that seem to be the target of the complaints about the physical presence rule already have a presence in most states and therefore already have to collect and remit sales taxes.  It is only the small or startup business that will be impacted by this decision.  While South Dakota puts a $100,000 or 200 transaction limit on the need to collect taxes, I have not seen where the court has determined that as the floor for the “substantial nexus with the taxing state”.  While the residents of South Dakota are “fairly related to the services the state provides”, they are not the ones directly bearing this substantial burden; it is the small businesses of other states that are.

South Dakota claims they lose between $48 million and $58 million every year to out of state sales that do not collect taxes, although I have not seen any data to support that claim.  A grand total of 10 minutes research found that in 2017, South Dakota had taxable sales of $21,120,502,661.  With a state sales tax rate of 4%, that means South Dakota collected $844,820,106.44 in sales tax.  At their estimate, South Dakota’s “lost” sales tax revenue is between 5.7% and 6.8% of their total receipts.  Now I admit that a 7% cut in revenue is not insignificant, but I have to wonder if this lawsuit will be worth it?  What will the economic impact on small businesses in South Dakota be when the other states with sales taxes start requiring them to file sales tax returns with them?  And how much will South Dakota spend processing additional returns from all over the country, not to mention tracking down those who don’t report?  While the court seems concerned with the advantage out of state sellers have and the growing impact of the modern economy, they have shown little data on the scope of that impact or the impact of their decision.

Of course one question that is never asked, much less answered, is: What authority does one state have to enforce laws outside of their jurisdiction?  The court claims the physical presence rule helps customers “evade a lawful tax”, though it does not show how shifting the burden of executing state law to citizens of other states is constitutional at all.  It is current law that if you purchase something from an out of state retailer that does not collect sales tax you are required to remit that tax yourself.  It appears to me that the problem is that South Dakota, and in fact every state with a sales tax, have not been able to collect these taxes from their own citizens and wants to place the burden on small businesses around the nation.  This seems more about punishing small internet businesses that collected the 6-7% additional sales tax revenue South Dakota claims.  How long before states start asking the federal government to collect out of state sales taxes for them?  Because that is a function for which the federal government is prohibited by the Tenth Amendment.

Justices Thomas and Gorsuch wrote their own concurring opinions.  Justice Thomas claims the physical presence rule in Bellas Hess and Quill “can no longer be rationally justified.”  On the contrary, I believe I have shown that the removal of that rule is what cannot be justified.  Justice Gorsuch believes the physical presence rule should be abolished, but believes that since the Constitution gives the power to regulate interstate commerce to Congress (Article I, Section 8, Paragraph 3), therefore Congress  should be the one to change interstate tax law.  Unfortunately Mr. Gorsuch, I do not see how concurring with an opinion you believe violates the Constitution is a proper exercise of judicial power.  In fact, chief justice Roberts along with justices Breyer, Sotomayor and Kagen dissented from the opinion for this very reason.

Unfortunately, this is yet another example of the federal government protecting the power of government over the rights of the people, violating both the Constitution’s separation of powers and their oaths of office in the process.  Until we hold our elected officials accountable to do their jobs of holding the other branches of government accountable for their actions, our rights will be further diluted by governments at all levels in their quest for money and power.

Author: Paul Engel

Paul Engel founded The Constitution Study in 2014 with the goal of helping everyday Americans read and understand their Constitution. Author, blogger, podcaster and speaker, Paul writes and podcasts at You can also find his books at

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