Ruling could fast track case to U.S. Supreme Court

A federal judge on Tuesday ordered that a lawsuit requiring out-of-state Internet companies to remit sales taxes to the South Dakota Department of Revenue should be heard in state court.

The decision by District Court Judge Roberto Lange could fast track South Dakota’s attempt to get before the U.S. Supreme Court, where officials hope to overturn a previous 1992 Supreme Court ruling that says states can’t collect sales taxes from businesses that don’t have a physical presence in their state.

Following legislative passage of a bill last year requiring some out-of-state Internet companies to remit sales taxes on purchases made in South Dakota, the state filed suit against four Internet companies. That lawsuit was filed in state court. But the companies asked Lange to move the proceedings into federal court. The Internet companies argued that because the issue dealt with a Supreme Court ruling and the Commerce Clause, it belonged there.

“We felt it was most appropriate to have the federal question decided in a federal court,” said George Isaacson, a lawyer representing the companies.

The state, however, argued that the proper jurisdiction for a state tax issue was in state court. Lange agreed.

“A century and a half of tradition counsels lower federal courts to be particularly cautious before ruling on the constitutionality of state tax laws,” Lange wrote.

In a statement, Tony Venhuizen, Gov. Dennis Daugaard’s chief of staff, said: “We are pleased with this ruling but don’t have further comment on pending litigation.”

By keeping the issue in state court, it’s possible that the case will move more quickly to the U.S. Supreme Court. The state has already conceded that, because of the 1992 Supreme Court decision, it would likely lose at the district level, which would then prompt an appeal to the South Dakota Supreme Court. A ruling there could be appealed directly to the U.S. Supreme Court. Had the case stayed in the federal court system, it might have taken many years to reach the U.S. Supreme Court.

Still, the U.S. Supreme Court only takes a small number of cases each year, said Jonathan Van Patten, a law professor at the University of South Dakota School of Law, and an even fewer percentage are heard from state courts.

But South Dakota has one thing going in its favor. Justice Anthony Kennedy in a recent Supreme Court opinion wrote of his desire to re-evaluate the 1992 decision – noting the evolution of the Internet and consumer buying habits.

“It’s got a chance, particularly if one of the justices has signaled his interest in revisiting the issue,” Van Patten said.

South Dakota has been fighting for years to find a way to tax Internet sales, in part because the state does not have an income tax and relies on sales taxes. Last week, Gov. Dennis Daugaard announced that Internet giant Amazon had agreed to begin remitting sales taxes beginning Feb. 1 on items purchased in South Dakota.