Court or Congress? State Online Sales Tax Power Set for Change

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Ryan Prete

South Dakota’s latest filing with the U.S. Supreme Court reiterated the state’s call for the justices to annul a much-maligned constraint on states’ taxing authority over online retailers.

Hours later, a U.S. Congresswoman vowed to pass e-fairness legislation before the high court can reach a decision.

Just before midnight Feb. 26, South Dakota filed its brief on the merits in South Dakota v. Wayfair —a case directly challenging the 1992 ruling in Quill Corp. v. North Dakota that prohibits states from imposing sales tax collection obligations on vendors lacking an in-state physical presence.

In the brief, South Dakota contends that its digital sales tax statute ( S.B. 106) “serves Quill’s own goals better than the physical-presence rule.” The state’s “economic nexus” law would enforce sales tax collection obligations on remote retailers with annual in-state sales exceeding $100,000 or 200 separate in-state transactions.

Meanwhile, on Feb. 27, the office of Rep. Kristi Noem (R-S.D.), the sponsor of the Remote Transactions Parity Act of 2017 (H.R. 2193) (RTPA)—which seeks to undo Quill—told Bloomberg Tax that the RTPA needs be enacted before the Supreme Court hands down a decision—potentially in June. The high court has scheduled oral argument for April 17.

“Proponents of RTPA believe legislation should really be done before the Supreme Court acts. Waiting until the Court acts is shortsighted,” said Brittany Comins, Noem’s deputy chief of staff and communications director. “If the Court overturns Quill, as expected, state taxing authority will be unleashed. Most states currently support legislative action, but with Quill gone, you can bet they will oppose any legislation that would limit their new authority.”

“We have been in active talks with the administration and congressional leadership about the potential chaos that could be brought on by judicial action without legislation,” Comins said.


Comins said that if Quill is overturned without federal legislation in place, businesses could immediately be responsible for collecting and remitting sales taxes.

“To add to the confusion, this requirement would be determined state-by-state. It could also be retroactive, creating even more chaos. There would be no infrastructure in place for this to happen, potentially causing a free-for-all,” she said.

Comins said that because approximately 10,000 different tax structures exist nationwide, a small business in South Dakota would need to comply with every one of them when selling across the country—or they could be subject to 10,000 separate audits.

“If we get Noem’s legislation done before the Supreme Court decision, we could avoid this free-for-all,” she added.

Frustration With South Dakota

Jeffrey Friedman, a tax partner at Eversheds Sutherland (US) LLP in Washington, told Bloomberg Tax that he was frustrated with holes in South Dakota’s latest brief, and that the RTPA would work to fill such voids.

“I wish counsel had proposed a more specific and understandable Constitutional standard,” Friedman said. “They seem to dance around what the standards should be, other than calling for an economic nexus standard. While they advocate that South Dakota’s $100,000 of in-state sales or 200 transactions should pass Constitutional muster, they do not apply a new Constitutional analysis.”

Friedman said attorneys representing South Dakota should expect questions on the lack of a standard during oral argument.

Friedman said that he was even more frustrated with the brief’s language describing software and retroactivity.

“Counsel goes a little too far in describing sales tax administration as a simple software issue. It’s more involved than that, and many companies employ significant resources to attempt to get it right,” Friedman said. “Additionally, and more frustrating, is that counsel dismisses the retroactivity issue. I think they have it entirely wrong. While not a big problem in South Dakota, we are already experiencing attempts of applying new sales tax collection standards on a retroactive basis. We should expect the Court to warn the states to not apply any new nexus rules on a retroactive basis.”

“All of this reminds me that Congress is much better suited to resolve these issues than the Supreme Court. Hopefully we will get federal legislation,” Friedman said. “The RTPA addresses all of these issues in more detail than the Court can in an opinion.”

The high court in Quill said Congress was best suited to resolve the issue of state taxation of online sales.

Congressional Action Unlikely

Jamie Yesnowitz, a principal and state and local tax practice and national tax office leader at Grant Thornton LLP, told Bloomberg Tax he thought the South Dakota brief contained some “thought-provoking” arguments. He wasn’t surprised the brief “concentrated on technological changes in the economy and the potential harm of not reacting to those changes to request an abrogation of the physical presence standard adopted in Quill.”

Yesnowitz further said the state presented a strong argument about the “wild-west landscape” should the Supreme Court uphold Quill—that even more non-uniform state sales and use tax laws would be enacted.

Yesnowitz wasn’t confident that Congress will move on the RTPA before a June ruling, saying “it would be a surprise” if Congress took action on the bill.

Jason Brewer, executive vice president of communications and state affairs at the Retail Industry Leaders Association, shared Yesnowitz’s doubts.

“It’s very unlikely that Congress will address the RTPA, simply because the Court could soon solve the problem,” Brewer told Bloomberg Tax.

Coalition Against RTPA

The National Taxpayers Union—a group whose foundation that filed a friend-of-the-court brief urging the U.S. Supreme Court to uphold Quill—announced Feb. 27 a coalition letter from 20 public policy groups in opposition to the RTPA.

“States have for years been aggressively moving to expand their tax and regulatory authority across borders, federalism and interstate commerce be damned,” Andrew Moylan, executive vice president of the NTUF, said in a press release sent to Bloomberg Tax. “The last thing Congress should do is validate their aggression by granting them new powers.”

The letter, in part, argues the RTPA would “upend the common sense system on which the internet has thrived in favor of a burdensome and expensive tax and audit regime that would fall hardest on small e-retailers,” according to the release.

“It’s never a good time to do the wrong thing. Our coalition of conservative organizations is united in saying that RTPA is a bad bill that Congress should reject,” Moylan said.

Other Federal Efforts

Noem’s bill isn’t the only federal proposal attempting to undo Quill. The Marketplace Fairness Act of 2017 (S.976) (MFA), introduced by Sen. Michael Enzi (R-Wyo.), also seeks to end Quill. Neither the RTPA or the MFA have received a floor vote or hearing from the 115th Congress.

Enzi’s office didn’t immediately respond to a request for an update on MFA efforts.

On the opposite end of the spectrum, the No Regulation Without Representation Act of 2017 (H.R. 2887) (NRRA)—which would, in part, codify Quill’s physical-presence standard—received a House Judiciary subcommittee hearing in July 2017. The bill hasn’t moved since then.

Rep. Bob Goodlatte (R-Va.), House Judiciary Committee chair, is often considered by members in the state and local tax community as the biggest hurdle to e-commerce reform. However, Goodlatte announced he will retire in November.

Next Steps

After South Dakota’s brief, outside parties have until March 5 to file friend-of-the-court briefs in support of South Dakota. Retailers in the case—Wayfair Inc., Newegg Inc., and Inc.—have until March 28 to file their brief on the merits, and supporters of the companies have until April 4 to file briefs in support.

South Dakota would be allowed to file a reply, no later than April 10, according to lawyers familiar with the case.

The case is South Dakota v. Wayfair, Inc. , U.S., No. 17-494, brief on the merits filed 2/26/18 .

With assistance from Laura Davison in Washington

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

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

Copyright © 2018 Tax Management Inc. All Rights Reserved.

Request Daily Tax Report: State