High Court Will Hear Digital Tax Case in April: Tax Lawyers

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By Ryan Prete

The U.S. Supreme Court won’t take long to hear a long-awaited test case for how and when states can tax online sales.

Several tax lawyers and professionals are forecasting the U.S. Supreme Court will hear arguments in the South Dakota v. Wayfair case this spring and deliver a decision in June.

The high court agreed in January to revisit its divisive 1992 ruling in Quill Corp. v. North Dakota that prohibits states from imposing sales and use tax collection obligations on vendors lacking an in-state physical presence. South Dakota’s deadline to file its brief on the merits is Feb. 26, after which the retailers in the case—Wayfair Inc., Newegg Inc., and Overstock.com Inc.—have 30 days to respond.

States have intensified efforts during the past few years to capture taxes lost in the modern e-commerce economy. According to MultiState Associates Inc., 34 states introduced 81 pieces of legislation during 2017 to recover revenue from digital commerce, and at least 14 measures have surfaced in six states during 2018—although a few bills have already died in New Mexico.

Tax professionals have mixed opinions on how state legislative efforts will continue while waiting on the high court.

“Right now, states are in a holding pattern,” Richard D. Pomp, the Alva P. Loiselle Professor of Law at the University of Connecticut School of Law, told Bloomberg Tax. Pomp said states won’t want to establish a premature “second-best” solution before the court comes to a decision in June.

Meanwhile, Joseph Bishop-Henchman, executive vice president at the Tax Foundation, told Bloomberg Tax he expects states to “keep up the pressure” to enact legislation to collect online sales tax despite a likely court ruling this June.

Georgia has introduced a bill H.B. 61 that would require out-of-state sellers to either collect and remit sales taxes for sales into Georgia, or file reports with the state and their Georgia customers to notify them of their tax obligations. Sponsoring Rep. Jay Powell (R) told the Senate Finance Committee Jan. 31 that he wanted the state to be ready to collect sales taxes from e-commerce if the U.S. Supreme Court upholds the similar South Dakota law.

April Likely?

Pomp said it’s rare for the high court to consider a case without pushing out a decision in the same term, so a decision should come soon.

Charles Rothfeld, special counsel at Mayer Brown LLP in Washington, said the court would hear oral arguments between either April 16-18 or April 23-25, despite a rule allowing the retailers to request an extension before filing their response brief.

“The Court won’t grant an extension; the argument will be in April,” Rothfeld told Bloomberg Tax in an email. “As a matter of practice the clerk usually will give a 30-day extension for the brief opposing cert, but it is much stingier when it comes to extensions for merits briefs after cert is granted. At this point in the term, it won’t grant extensions.”

A lawyer familiar with the case also said it would be heard and decided by June, and that the exact oral argument date will be released in the coming days.

Wave of Briefs

A flurry of friend-of-the-court briefs supporting each party is expected in the coming weeks. Thirty-five states and the District of Columbia filed a brief urging the high court to take the case. Also filing briefs were:

According to a lawyer familiar with the case, friend-of-the-court briefs supporting South Dakota’s plea for the high court to undo Quill are due March 5.

On March 28—barring a court-granted extension—the e-commerce companies must file their response brief. Friend-of-the-court briefs in support of the retailers would be due April 4.

States to Pick Up Efforts?

Meanwhile, many states have rallied this year behind a handful of approaches to recover online taxes.

In 2018, New York and Hawaii are mulling measures attempting to capture taxes on third-party transactions facilitated through Amazon.com Inc. and other marketplace providers. New Mexico also introduced similar pieces of legislation, but those proposals died this session. And Washington, like Georgia, has introduced economic nexus-related legislation, while Nebraska also is considering a carryover bill addressing economic nexus.

This follows an active 2017 legislative session, which included several significant developments:

  •  Nearly 20 states pursued economic nexus models through administrative rule or statute, seeking sales tax collection from retailers satisfying a specified threshold of sales. Several enacted laws, including Indiana, Maine, Wyoming, and North Dakota—although the latter two states currently aren’t enforcing their laws. And many states are engaged in litigation over their regimes.
  •  Minnesota adopted a first-of-its-kind law requiring Amazon-type marketplace providers to collect sales tax on third-party marketplace transactions. Washington, Rhode Island and Pennsylvania soon followed.
  •  Massachusetts released its “cookie nexus” regulation, which requires online vendors to collect state sales tax if they have property interests in or use in-state apps and “cookies.” Ohio followed with its cookie-type regime that mandates sale tax collection from remote retailers placing in-state software on residents’ computers and other devices.
Several states also have followed Colorado’s lead with its 2010 notice and reporting statute, which the the U.S. Court of Appeals for the Tenth Circuit upheld as constitutional. Louisiana, Pennsylvania, Rhode Island, Vermont, and Washington have adopted similar laws.

To contact the reporter on this story: Ryan Prete in Washington at rprete@bloombergtax.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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