Cato Institute, Americans for Tax Reform Join Sales Tax Tiff (1)

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By Ryan Prete

Federal lawmakers, select states, and multiple companies and organizations have flooded the U.S. Supreme Court with calls to uphold a sales tax rule that bars states from imposing sales tax collection obligations on remote retailers.

A wave of briefs filed April 3 and 4 in South Dakota v. Wayfair, Inc. voiced support for e-retailers Wayfair Inc., Newegg Inc., and Inc., which are contesting a South Dakota digital sales tax law. Over 20 briefs have been filed since late March in favor of the e-commerce companies.

Oral argument is scheduled for April 17, and practitioners expect a decision by late June.

The Cato Institute, a libertarian think tank founded in part by billionaire Charles Koch—chairman of the board and CEO of the conglomerate Koch Industries—and Americans for Tax Reform— a politically conservative U.S. taxpayer advocacy group founded by Grover Norquist—are among the groups urging the high court to uphold the 1992 Quill Corp v. North Dakota decision. Under the 26-year-old opinion, a vendor must have an in-state physical presence before it’s obligated to collect sales tax.

Marketplace providers Etsy Inc. and eBay Inc. likewise are asking the Supreme Court to preserve the physical presence rule. The states of Montana and New Hampshire also chimed in, as did several congressional members—including House Judiciary Chair Bob Goodlatte (R-Va.), a lawmaker often considered by members in the state and local tax community as the biggest hurdle to e-commerce reform.

‘Very Strange and Unique Case’

The Cato Institute raised several arguments challenging the constitutionality of South Dakota’s digital sales tax statute, S.B. 106, which would mandate sales tax collection from retailers with annual in-state sales exceeding $100,000 or 200 separate in-state transactions.

“A federal constitutional structure inevitably poses such difficulties, particularly if goods flow freely interstate,” the Cato Institute argued in its brief. “South Dakota may have to use other means to generate revenue or invest in raising awareness of its use tax, but that’s not a justification for abridging the Due Process and Commerce Clauses. Governments around the world are prone to complain about the difficulties of collecting taxes, but our Constitution was not written to bend to states’ desire to raise revenue.”

Trevor Burrus, a research fellow at the Cato Institute, told Bloomberg Tax that while South Dakota’s law is good tax policy, it isn’t constitutional.

“The constitutionality of the case is bigger than the tax aspect of the case,” Burrus said. “South Dakota could very well affect business conducted in their state with this tax policy.”

Burrus called South Dakota v. Wayfair “a very strange and unique case to read,” but predicted that the Supreme Court would overturn Quill, citing the overwhelming support of states to reverse the precedent.

‘Retroactive Liability’

Meanwhile, Americans for Tax Reform (ATR) raised the issue of retroactive taxes—a topic that states weren’t looking at, Max Behlke, director of budget and tax at the National Conference of State Legislatures, previously told Bloomberg Tax.

“If this Court overturns Quill, retailers with no presence in a taxing State will face complex and costly collection obligations, the threat of expensive and intrusive audits from thousands of taxing jurisdictions, and potential retroactive tax assessments,” according to ATR’s brief. “For service providers, such obligations may arise when a seller has neither solicited sales nor agreed to provide services in a state, simply by virtue of the purchaser’s decision to pass on the benefit of the service to employees located across the country. These are heavy burdens on interstate and international commerce, and the economic nexus thresholds imposed by South Dakota are insufficient to alleviate them.”

ATR further argued that Congress, not the South Dakota Legislature, is the proper body to legislate nexus standards, and that “rewarding South Dakota for passing an unconstitutional law to challenge a Supreme Court precedent could have dangerous consequences for our constitutional order.”

Goodlatte Chimes In

In a bipartisan congressional submission led by Goodlatte, federal lawmakers argued that “Congress is institutionally best situated to address the issues in this litigation.” Despite the call for Congress to act, lawmakers failed to include a digital tax provision in a federal omnibus spending bill signed by President Donald Trump March 23.

The push for the provision was led by Rep. Kristi Noem (R-S.D.), whose stance on digital tax counters that of Goodlatte.

Noem is the sponsor of The Remote Transactions Parity Act of 2017 (H.R. 2193) (RTPA), which seeks to undo Quill. Noem’s bill hasn’t moved. Sen. Mike Enzi’s (R-Wyo.) Marketplace Fairness Act of 2017 (S.976) (MFA), —which also seeks to kill Quill—also has remained stagnant.

A bill seeking to codify Quill, the No Regulation Without Representation Act of 2017 (H.R. 2887) (NRRA), sponsored by Rep. Jim Sensenbrenner (R-Wis.), did receive a July 2017 House Judiciary subcommittee hearing. However, it’s stalled since then.

Flurry of Briefs

As of press time on April 4, other submissions supporting the e-retailers include those filed by:

The case is South Dakota v. Wayfair, Inc. , U.S., No. 17-494, friend-of-the-court briefs filed 4/4/18 .

To contact the reporter on this story: Ryan Prete in Washington at

To contact the editor responsible for this story: Ryan C. Tuck at

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