Digital Tax Arguments Focus on Role of Congress, Compliance Costs

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U.S. Supreme Court Justices focused on the role of Congress and real compliance burdens for small businesses during oral arguments in a case concerning the constitutionality of digital taxation.

The highly anticipated arguments in South Dakota v. Wayfair wrapped up this morning. The case is a direct challenge to the 1992 decision in Quill Corp. v. North Dakota, which prohibits states from imposing sales-tax collection obligations on vendors lacking an in-state physical presence.

The case has set off perhaps the largest amount of state and local tax-related activity in the past decade as states have tried to “kill Quill” as online commerce has replaced traditional brick-and-mortar markets.

Heeding calls from traditional retailers and dozens of states that for years have attempted to circumvent Quill, the high court Jan. 12 accepted the case. They are reviewing South Dakota’s contention that the Quill ruling is obsolete in the e-commerce era and should be overturned. In Quill, which involved a mail-order company, the U.S. Supreme Court invoked the so-called dormant commerce clause, a judge-created legal doctrine that bars states from interfering with interstate commerce unless authorized by Congress.

E-retailers Wayfair Inc., Inc. and Newegg Inc. have challenged South Dakota’s digital sales tax statute, S.B. 106 (S.D. Codified Laws Chapter 10-64), which the South Dakota Supreme Court last year found unconstitutional under Quill.

Justices Sonia Sotomayor, Stephen Breyer, and Elena Kagan individually asked South Dakota Attorney General Marty Jackley (R)—who spoke on behalf of South Dakota—what made Quill's precedent unique enough to allow the Court to reverse it, rather than allow for Congress to address the issue.

Jackley said that Congress' inability to address the issue of digital taxation for 26 years made the case unique.

Breyer cited briefs filed by U.S. senators and Rep. Bob Goodlatte (R)—in favor of the e-retailers—which, in part, argued that Congress is the proper party to address the Quill precedent.

Breyer said that the lawmaker's briefs recognize Congress' responsibility over the issue of digital taxation.


Real Compliance Costs


Breyer and Justice Neil Gorsuch also asked George Issaacson, attorney to the e-retailers, why compliance cost estimates varied so greatly.

Issaacson said that small- and medium-sized businesses could face costs of up to $250,000, while Jackley said that costs could be as low as $12 a month for 30 transactions.

Breyer asked Issacson if he could offer an estimate on the compliance costs of Inc., a company that collects sales and use tax on purchases in all states that impose it.

When Issacson said he wasn't sure of Amazon's compliance costs, Breyer said that real compliance totals for Amazon and other companies could help him come to a decision over the future of Quill.


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