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How do you decide which party in a case should prevail when both sides are logical?
U.S. Supreme Court Justice Stephen Breyer worked through this question during April 17 oral arguments in South Dakota v. Wayfair , which many consider the “tax case of the millennium,” one that could shift how online sales are taxed nationwide. During an oral argument rife with questions about the compliance burdens and costs associated with digital sales taxes, Breyer peppered the attorneys with several factual inquiries to determine which side is right.
“When I read your briefs, I thought absolutely right,” Breyer said to South Dakota Attorney General Marty Jackley (R), who argued on behalf of the state. “And then I read through the other briefs, and I thought absolutely right. And you cannot both be absolutely right.”
South Dakota brought the case to the high court after the state Supreme Court last year struck down its digital sales tax law S.B. 106 (S.D. Codified Laws Chapter 10-64). The state had viewed the statute as a tool to trigger an appeal that ultimately annuls Quill Corp. v. North Dakota —the 1992 decision that has curtailed states’ authority over interstate taxation by mandating a vendor must have an in-state physical presence before it is required to collect sales tax.
As the justices inserted themselves during the argument, potential divisions started to surface, with some suggesting that Congress may be better suited to act in this area—something the Supreme Court itself suggested in Quill, but an invitation that Congress has never acted on in 26 years.
Practitioners expect the Supreme Court will release its decision by late June. The courtroom was at full capacity for the long-anticipated test case for the “kill Quill” movement, with many having lined up since before 3 a.m.
Justice Samuel Alito, who has championed the commerce clause restraints in prior decisions, asked Jackley if there were only two options for resolving the ongoing battle over digital sales taxes, which would he prefer:
“Congress has had 26 years to address this issue,” Jackley said. “And it’s not Congress, but it’s Quill, it’s this Court’s decision, that is striking down our state statutes.”
Justice Elena Kagan chimed in by saying “it gives us reason to pause” when Congress could have addressed, but chose not to address, an over 25-year-old issue.
“This is not the kind of issue where you say, well, probably didn’t get on Congress’ radar screen or maybe Congress was too busy doing other things,” Kagan said. “This is a very prominent issue which Congress has been aware of for a very long time and has chosen not to do something about that.”
Breyer likewise questioned why the justices should act, particularly because the high court is more willing to overturn constitutional precedent when Congress can’t act—while in this case, Congress can act. He further noted that several federal lawmakers filed briefs saying “Congress was about to act,” but stopped when the Supreme Court decided to take the Wayfair case.
“They’re members of Congress, and they point to many statutes. And you are 50 states. If you do not have the power to get Congress to do something, I don’t know who would,” Breyer said.
However, “Congress doesn’t have an incentive in this instance to take action in something that could be perceived as a tax when yet they don’t get the opportunity to use the revenue,” Jackley said.
Three bills are pending in this congressional term to address the issue, and Rep. Kristi Noem (R-S.D.), who sponsored the Remote Transactions Parity Act of 2017 (H.R. 2193), recently fell short in a last-minute attempt to persuade lawmakers to include a digital tax provision in a federal omnibus spending bill signed by President Trump March 23.
Alito noted that at this time, it seems states and e-retailers have an incentive to request a congressional solution—retailers must deal with Colorado-style notice/reporting statutes and “aggressive moves by states to try to bring taxation within Quill in some way,” and capturing internet-based revenue still motivates states.
“But if Quill is overruled, what incentives do the states have to ask for any kind of congressional legislation?” Alito asked.
“If Quill is overruled, the states will have their constitutional responsibilities to follow” in the high court’s prior opinions in Complete Auto Transit Inc. v. Brady and Pike v. Bruce Church , Jackley said.
Presenting on behalf of the United States, Deputy Solicitor General Malcolm L. Stewart said that no matter how the Supreme Court acts, Congress can impose any solution it deems appropriate.
“If states are given greater latitude to experiment in this area, to devise different schemes,” Congress will have a broad set of models to survey to determine which aspects it would like to incorporate into a federal solution.
However, Justice Sonia Sotomayor quickly commented that problems and lawsuits would ensue during the interim period prior to a congressional solution.
South Dakota deferred 10 minutes of its argument time to the U.S. President Donald Trump has been outspoken about wanting Amazon, Inc. to pay state and local taxes.
Meanwhile, Breyer raised several questions about difficult practical issues that the top U.S. Court may need to resolve in issuing its opinion such as:
“There are empirical questions that I think would help me reach an answer,” he said to George Isaacson, counsel for e-retailers Wayfair Inc., Overstock.com Inc. and Newegg Inc., who are contesting South Dakota’s statute. “And if you know them, tell me. No one asked Amazon. What does it cost Amazon? What does it cost the mandolin seller?”
Panelists speaking at an event co-sponsored by McDermott Will & Emery and the Council On State Taxation said they were surprised with Breyer’s frustration as he asked the attorneys to tell him what to do. Joe W. Garrett Jr., deputy commissioner for the Alabama Department of Revenue, said Breyer was “conflicted”, and thought perhaps Justice Neil Gorsuch “might work on Breyer a little bit to say leaving Quill in place won’t protect small sellers from state burdens. Burdens would come in another form.”
Alabama is among the states that has led the kill Quill movement, and is one of several states with pending litigation over state laws designed to challenge Quill. Indiana, Ohio, Tennessee, Virginia (regarding a Massachusetts regulation), and Wyoming are the others.
Some state and local tax practitioners had labeled Breyer a “wild card” in the Wayfair case, with his prior opinions shedding little light on his potential perspective regarding digital sales taxes. Likewise, practitioners were unsure how Sotomayor might come down in the decision.
During today’s oral argument, Sotomayor was the first justice to jump into the fray. The panelists at the McDermott/COST event, which was co-sponsored by Bloomberg Tax, said they were surprised by what could be perceived as Sotomayor’s attack against South Dakota.
Sotomayor opened her questioning by asking Jackley whether the problem of lost sales tax revenue and an imbalanced retailer playing field stemmed from Quill—or from “the fact that you don’t have a mechanism to collect from consumers?”
She further raised several concerns regarding South Dakota’s statute, emphasizing her “concern about the many unanswered questions that overturning precedents will create a massive amount of lawsuits about"—such as retroactivity, minimum contact to require sales tax collection, and potential problems with technology facilitating compliance.
“All of these are questions that are wrought with difficulties,” Sotomayor said. “So you’re introducing now a whole set of difficulties to put behind something that’s been in place for 30 years now?”
Responding to Sotomayor’s question about the minimum number of sales necessary to trigger tax obligations, Jackley said “one sale.” However, he also emphasized several times that if Quill is overruled, states still will be contained by the balancing tests in Complete Auto and Pike.
Diann Smith, counsel with McDermott, said during the McDermott/COST event that she was surprised that South Dakota “started with the one-sale line. I don’t know why they did that.”
Prior to today’s oral argument, several state and local tax practitioners had forecast Justices Anthony Kennedy and Gorsuch—a former Kennedy clerk—would favor a decision killing Quill.
A Kennedy concurrence in the 2015 Direct Marketing Association v. Brohl opinion kindled a firestorm of state statutes and regulations seeking to capture revenue from remote retailers—and striving to spark a Supreme Court appeal that ultimately overturns Quill. After that case returned to the U.S. Court of Appeals for the Tenth Circuit, which upheld Colorado’s notice and reporting statute as constitutional, then-Tenth Circuit Judge Gorsuch authored a concurrence that “ Quill might be said to have attached a sort of expiration date for mail order and internet vendors’ reliance interests on Bellas Hess’s rule by perpetuating its rule for the time being while also encouraging states over time to find ways of achieving comparable results through different means.”
Kennedy kept quiet for most of the oral argument—which didn’t necessarily surprise practitioners.
Kennedy “keeps his cards close to his vest,” M. Miller Baker, partner with McDermott, said during the McDermott/COST event. He added that Kennedy has already expressed considerable skepticism about Quill.
During oral argument, Gorsuch noted that several retailers must comply with multiple rules in varying jurisdictions. Why should the court favor “a particular business model” that doesn’t rely on a brick-and-mortar presence, Gorsuch asked Isaacson.
“Borders count. States exercise their sovereignty based upon borders, territorial limits. It’s a key part of horizontal federalism in this country,” Isaacson said. “So if there’s going to be some standard that determines when is a company subject to the tax jurisdiction of a state,” using a state’s territorial limits makes sense.
“So the United States has suggested that even one sale into the state would require collection,” he later added. “Now a point of sale retailer only has to comply with one jurisdiction where their store is located.”
Gorsuch didn’t appear persuaded, simply responding by stating, “not necessarily.”
Gorsuch’s questions followed an initial inquiry from Justice Ruth Bader Ginsburg, who asked why the issue was about discriminating against a subset of sellers rather than “equalizing sellers.”
“The dormant commerce clause takes as its principal objective the maintenance of a single national marketplace that is free and accessible to all participants,” Isaacson said. And the Supreme Court found in the National Bellas Hess Inc. v. Department of Revenue of Illinois decision “that the existence of 2,300 different sales and use tax jurisdictions with varying rates, varying exemptions, varying taxability items, varying fulfillment requirements and audit obligations, was a burden on in-state commerce.”
“In 1992, when Quill was decided, that figure went from 2,300 to 6,000. That figure today is over 12,000 different jurisdictions,” Isaacson added, stressing that the marketplace complexities have worsened over time.
With assistance from Matthew Beddingfield in Washington
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