Supreme Court hears arguments in online sales tax case
- April 17, 2018 | Gail Cole
Today, the Supreme Court of the United States heard oral arguments in South Dakota v. Wayfair, Inc., a case that could change the way states can tax out-of-state sales.
The case regards South Dakota’s economic nexus law (SB 106). At issue is whether the Supreme Court should abrogate Quill Corp. v. North Dakota’s physical presence test, which prevents states from requiring out-of-state retailers to collect and remit sales tax. In 1992, the Supreme Court ruled in Quill Corp. v. North Dakota that a state can only require a business to collect and remit sales or use tax if it has a physical presence in the state.
Quill: “questionable even when decided”
No one can know how the justices stand on this issue until they issue a decision — expected in June — and surmising how they’ll vote based on the oral arguments is risky. Nonetheless, we can still look at what was said during the April 17 arguments.
South Dakota pointed out in its initial petition to the court, “Quill … has been roundly criticized by members of this Court, including Justices Kennedy, Thomas, and Gorsuch.” Indeed, Justice Anthony Kennedy invited a challenge to Quill in a concurring opinion, writing “Given … changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court’s holding in Quill. A case questionable even when decided, Quill now harms States to a degree far greater than could have been anticipated earlier. … It should be left in place only if a powerful showing can be made that its rationale is still correct.”
However, Justice Kennedy didn’t speak much during today’s oral arguments. According to Joseph Bishop-Henchman of the Tax Foundation, who shared comments about the arguments on Twitter, he “only spoke to observe presuppositions of Quill being incorrect.”
Prior to ascending to the Supreme Court, then Judge Neil Gorsuch of the 10th Circuit Court also penned a concurring opinion, in which he wrote: “Everyone before us acknowledges that Quill is among the most contentious of all dormant commerce clause cases. Everyone before us acknowledges that it's been the target of criticism over many years from many quarters, including from many members of the Supreme Court.” He added that “Quill might be said to have attached a sort of expiration date” for mail order and internet vendors.
Today, Justice Gorsuch focused his questions on the burden South Dakota’s law would impose on remote sellers, as compared to the burdens born by non-collecting sellers in Colorado. Colorado imposes onerous notice and reporting requirements on non-collecting sellers, which Gorsuch (acting as a circuit court judge) and the Supreme Court let stand.
Justice Clarence Thomas was silent, as he often is when listening to arguments. Yet the National Conference of State Legislatures (NCSL) points out that he has “rejected the concept of the dormant Commerce Clause, on which the Quill decision rests.”
Justice Ruth Bader Ginsburg called the Quill precedent “obsolete,” according to Bloomberg. As NCSL puts it, “The most vocal champion of overturning Quill was Justice Ruth Bader Ginsburg. She said the court needs to take responsibility for overturning precedent it created, which is no longer appropriate in the current economy, instead of relying on Congress to act.”
The tax burden
Several justices worried that small business would suffer if they were to overturn Quill.
According to Bishop-Henchman’s tweets, Justice Stephen Breyer also “asked a lot about the disputed size of collection burden.” He wondered, “What does it cost the mandolin seller?” Yet he also noted that software can facilitate compliance.
Justice Samuel Alito worried that states would “grab everything they could” if Quill were overturned, “rather than exempt small businesses from having to collect” (NCSL). And Justice Sonia Sotomayor said she’s worried about “the costs that we’re going to put on small businesses.”
Let Congress decide
Back when Quill was decided, the justices wrote that their decision “was made easier by the fact that the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve. No matter how we evaluate the burdens that use taxes impose on interstate commerce, Congress remains free to disagree with our conclusions.”
Letting Congress decide seemed to be on the minds of several of the justices today. As Bloomberg reports: “Justice Sonia Sotomayor indicated that she would rather leave it to Congress to overturn the Quill ruling. Sotomayor said the real problem for states was not Quill but the absence of a mechanism for collecting the taxes directly from consumers.” When businesses don’t collect tax on a taxable transaction at the point of sale, consumers are supposed to voluntarily remit the corresponding consumer use tax directly to the state. Few do, however, and it’s difficult and costly for states to enforce compliance.
Justice Elena Kagan pointed out that Congress is aware of this issue, “and she suggested a high bar for those who want the court to overrule its past decisions.” Bishop-Henchman tweeted, “Kagan asked hard questions on both sides, esp. on wisdom of Court acting vs Congress acting.” And Justice Sotomayor “asked how the Court could signal that it wants Congress to act.”
Many state and local tax experts participating in a post-argument roundtable agreed that the court seems to want Congress to act.
Several pieces of legislation tackling this issue have been introduced in Congress, and in May 2013, the Senate approved one such bill. Yet all measures have stalled in the House. Congress is deeply divided on this issue.
The problem has “peaked”
Of course, the problem could go away on its own. Chief Justice John Roberts said he thought the problem of untaxed sales had “peaked” now that Amazon and some other large ecommerce businesses collect and remit tax in many or all states: “E-commerce is expanding, and companies like Amazon account for a large part of that. But they’re already collecting in all 50 states.”
While Justice Roberts is correct that Amazon collects tax in all states that have a sales tax, he overlooks the fact that the company only collects on its own sales. In most states, it doesn’t collect tax on third-party, or marketplace sales. Other marketplace sellers are in the same boat. Learn more about state efforts to tax marketplace sales.
The waiting place
Until the Supreme Court issues a decision, we’re all stuck in what Dr. Seuss so aptly named “the waiting place” — an especially tricky place for anyone who makes sales in states where they have no physical presence.
But waiting for a decision doesn’t mean you have to do nothing. Now is a good time to learn more about South Dakota v. Wayfair and its potential implications. And it’s an ideal time to undertake a nexus study to determine if and where your business activities create nexus. Learn more.