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South Dakota v. Wayfair, Inc.

United States District Court for the District of South Dakota · Constitutional Law

Constitutional LawFederal Question JurisdictionRemovalState Taxationfederal questionremovalwell-pleaded complaintstate declaratory judgment

Facts

South Dakota enacted S.B. 106, which required certain out-of-state sellers to collect and remit South Dakota sales tax as if they had a physical presence in the state. The statute applied only to sellers exceeding $100,000 in gross revenue from South Dakota sales or more than 200 separate transactions, directed the State to bring a declaratory judgment action testing the law’s validity, and stayed enforcement upon filing such an action. South Dakota sued Wayfair, Overstock, Newegg, and Systemax in state court, expressly acknowledging that a change in federal constitutional doctrine would be necessary for it to prevail. After Systemax agreed to register and was dismissed, the remaining defendants removed, asserting federal-question jurisdiction.

Issue

Whether a state-court action by South Dakota seeking to declare valid and enforce a state tax statute, where the only real dispute is whether existing federal constitutional precedent renders the statute unconstitutional, arises under federal law for purposes of 28 U.S.C. § 1331 and is therefore removable to federal court.

Rule

Federal courts lack original and removal jurisdiction over a state declaratory-judgment and enforcement action when federal law does not create the cause of action and the federal issue appears only as a defense, even if the defense is anticipated in the complaint and is the only truly disputed issue. Under Grable, a state-law claim supports federal-question jurisdiction only if it necessarily raises a stated federal issue, actually disputed and substantial, that a federal forum may entertain without disturbing the congressionally approved balance of federal and state judicial responsibilities.

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Kansas enacts a statute requiring certain out-of-state streaming equipment sellers to collect state sales tax if they exceed specified in-state sales thresholds. The statute directs the Kansas revenue department to file a declaratory-judgment action to test the statute's validity, and Kansas sues Ridgeview Digital Supply, a Nevada company, in Topeka state court while expressly alleging that existing Supreme Court precedent likely makes the statute unconstitutional unless that precedent is changed.

Ridgeview removes to federal district court, arguing that the only real issue in the case is whether the federal Constitution permits Kansas to impose the tax duty. Is removal proper under 28 U.S.C. § 1331?

Explanation. Removal is improper. The majority held that when state law creates the cause of action and the federal issue arises only as a defense, the well-pleaded complaint rule defeats federal-question jurisdiction even if the complaint anticipates the defense and even if everyone agrees the federal question is the only issue truly disputed. The state can plead its own claim by alleging the statutory thresholds and noncompliance; the constitutional objection comes in response. (Derived from South Dakota v. Wayfair, Inc. (n.d.).)