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By Ryan Prete
Many interested parties believe the U.S. Supreme Court will lean in their favor after oral arguments in a case that could completely change the way states tax online commerce.
The highly anticipated arguments in South Dakota v. Wayfair wrapped April 17 after years of attempts to undo the high court’s 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.
Rep. Bob Goodlatte (R-Va.) told Bloomberg Tax after the arguments that he is confident that Congress will codify Quill’s standard and recognize Congress’ power over the issue of digital taxation.
“We need the court to say that this is something that legislators have the power to address,” Goodlatte said. “I think the court will be fair in its ruling and will preserve the current state of interstate commerce.”
He said the crux of the case is for the court to give Congress control over keeping or undoing Quill.
Goodlatte is the outgoing chairman of the House Judiciary Committee and is a fervent supporter of Quill. He is often considered by members in the state and local tax community as the biggest hurdle to e-commerce reform, which has stalled in Congress for decades despite many bills introduced to address the matter (three are pending this term). The court in Quill said Congress is best suited to resolve the issue of interstate taxation of online sales.
South Dakota Attorney General Marty Jackley (R)—who spoke on behalf of South Dakota during the oral arguments—told Bloomberg Tax that he offered a voice for small businesses that in the past has been silenced.
“Congress has had 26 years to solve this issue and has failed. It’s time that main street businesses have a voice and are recognized,” Jackley said.
He sad he was confident in the arguments presented in favor of South Dakota, and that the court would rule to undo Quill‘s quarter-century long precedent.
Jackley is running against U.S. Rep. Kristi Noem (R) in the Republican primary for South Dakota Governor. Both are fierce supporters of digital tax reform. Noem is the sponsor of the Remote Transactions Parity Act of 2017 (H.R. 2193)—which seeks to undo Quill.
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., Overstock.com 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.
Steve DelBianco, president and CEO of NetChoice, a Washington-based internet commerce trade association, told Bloomberg Tax after the oral arguments that he wasn’t happy that the case made it to the high court.
“The states should’ve stayed at the table and negotiated appropriate congressional legislation, but instead they ran to the court. But I’m optimistic about the line of questioning I heard today,” he said.
NetChoice—in coordination with former Rep. Chris Cox (R-Ca.) and former Virginia Gov. James S. Gilmore III (R)—was one of more than 20 groups that filed friend-of-the-court briefs in favor of the e-retailers. The group has been involved in almost all of the litigation relating to state laws designed to “kill Quill,” which remain pending in lower courts in Indiana, Ohio, Tennessee, Virginia (regarding a Massachusetts regulation), and Wyoming.
DelBianco said he doesn’t see how the court can rule on Quill without appearing as a legislative body instead of a judiciary body.
“I don’t know how they can put fine tuning into place in a ruling like this, even when they have the South Dakota law in front of them. Its obvious that when it comes to imposing standards to simplify, only the Congress can do that,” DelBianco said.
Deborah White, senior executive vice president and general counsel at the Retail Industry Leaders Association, said she was “hopeful” the U.S. Supreme Court would reverse Quill, and called the oral arguments a “big day for America’s Main Street retailers.”
“For too long, giant online sellers have held a distinct advantage over local brick and mortar stores,” White said in a press release. “We are thankful that the Supreme Court heard today’s oral arguments and are hopeful that once and for all, all retailers will have the opportunity to compete on a level playing field.”
The Retail Litigation Center Inc. was one of a dozen groups to file a brief to the high court in favor of South Dakota.
During oral arguments, the justices focused on the role of Congress and the extent of the compliance burdens for small businesses if Quill were undone.
Justices Sonia Sotomayor, Stephen Breyer, and Elena Kagan individually asked Jackley 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 it was Congress’ inability to address the issue of digital taxation for 26 years.
Breyer cited briefs filed by several U.S. senators and Goodlatte—in favor of the e-retailers—which, in part, argued that Congress is the proper party to address Quill.
Breyer said the lawmakers’ briefs recognize Congress’ responsibility over the issue of digital taxation.
U.S. Deputy Solicitor General Malcolm Stewart, who was allotted a third of South Dakota’s argument time, acknowledged that “whatever this Court decides, whether it overrules Bellas Hess and Quill, whether it leaves those in place, whether it does something in between, Congress can act.”
“Congress can impose whatever solution it believes is appropriate,” he said.
President Donald Trump has been outspoken about wanting Amazon, Inc. to pay state and local taxes.
Breyer and Justice Neil Gorsuch also asked George Issaacson, attorney for the e-retailers, why compliance cost estimates varied so greatly.
Issaacson said small and medium-sized businesses could face costs of up to $250,000, while Jackley said costs could be as low as $12 a month for 30 transactions.
Issacson reasoned that compliance issues outside of software, such as audits, exemption certificates, and mapping inventory could contribute hundreds of thousands in compliance costs.
Breyer said both parties make sense in their arguments, but that he needed more evidence to decide how to rule.
“Both are logical. How do I decide who’s right?” Breyer said.
He asked Issacson if he could offer an estimate on the compliance costs of Amazon, a company that now collects sales and use tax on purchases in all states that impose one at the state level.
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.
The case is South Dakota v. Wayfair, Inc., U.S., No. 17-494, oral argument 4/17/18 .
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