No Grounds for High Court to Undo Sales Tax Rule: E-Retailers

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By Ryan Prete

The U.S. Supreme Court shouldn’t upend a 26-year-old restriction on states’ taxing authority over remote retailers because state sales tax systems “remain inordinately complex and burdensome during the Internet era, just as they were before it began.”

That’s one of the many arguments by Brann & Isaacson, the law firm representing e-retailers Wayfair Inc., Newegg Inc., and Inc. in South Dakota v. Wayfair—a direct challenge to the 1992 ruling in Quill Corp v. North Dakota prohibiting the imposition of sales tax on digital interstate purchases.

“In asking the Court to overrule Quill Corp. v. North Dakota, and the constitutional standard that a retailer must have a ‘physical presence’ in a state before that state can impose sales tax collection obligations on a remote seller, the State of South Dakota, and its supporters, have mischaracterized the continuing complexity of state sales tax systems and exaggerated the capabilities and usefulness of sales tax software,” the law firm said in a March 29 statement emailed to Bloomberg Tax. “Moreover, they fundamentally misunderstand the significance of electronic commerce in the retail marketplace, and they grossly overstate the level of uncollected sales tax on remote sales.”

The e-retailers’ March 28 brief on the merits was the last filing from the e-retailers before April 17 oral argument in the case. Friend-of-the-courts briefs supporting the e-retailers are due April 4.

“In their brief, Respondents Wayfair, Overstock, and Newegg set the record straight,” the law firm said. “The companies demonstrate that there is no justification for abrogating a long-standing precedent that has protected interstate commerce, contributed to economic expansion, and been relied upon by thousands of companies to grow their businesses without the undue burdens of multiple and inconsistent state taxes and regulations.”

Brann & Isaacson also said that if the high court rules in favor of South Dakota, casting away Quill, that states must adopt uniform and simplified sales tax systems—but that Congress must be the body to act.

“There are proposals before Congress that would achieve this result,” the law firm said. “Congress, and not the courts, is the better forum for addressing the appropriate scope and limitations on state taxing authority.”

‘Field of Dreams’ Promise

The e-retailers list over a dozen reasons why the court should affirm Quill. One argument alleges that states’ lack of simplification shouldn’t result in increased power over retailers, and that the Streamlined Sales Tax initiative doesn’t have enough membership.

Joe W. Garrett Jr., deputy commissioner for the Alabama Department of Revenue, told Bloomberg Tax that the e-retailers are blatantly wrong.

“They have the chicken and the egg in the wrong order,” Garrett said. “The reason more states did not join Streamlined is because there was no direct incentive to join, no concrete promise from Congress or the Court that if the state joined then it would gain jurisdiction over remote sellers.”

Garrett said that more states would have simplified their sales tax systems had they known they would gain jurisdiction over remote sellers and untapped tax revenue.

Garrett said states were instead given a “Field of Dreams” promise: if they built it—"it” being a simplified system—they will come—meaning Congress would give states increased power over sellers.

“That dynamic is still at play,” Garrett said. “It needs to be reversed, and the Court has the opportunity to reverse it” by ruling for South Dakota, a state with a “simple system.”

‘Hand They Were Dealt’

Jeffrey Friedman, a tax partner at Eversheds Sutherland (US) LLP in Washington, told Bloomberg Tax he thought the e-retailers’ attorneys did a good job with the brief.

“They effectively made their arguments and presented them in the most compelling way,” Friedman said. “They made their legal arguments regarding stare decisis, description of the burden on interstate commerce presented by sales tax collection, whether technology and software reduces the compliance burden, and whether physical presence is workable.”

Friedman said the attorneys succeeded in playing the hand they were dealt.

“Whether those arguments win the day is another story, however,” he said.

No Progress in Congress

Parties both for and against Quill have argued that Congress is the proper body to change the law, not the Supreme Court. However, two congressional bills seeking to undo Quill have long stalled.

The Remote Transactions Parity Act of 2017 (H.R. 2193) (RTPA), introduced by Rep. Kristi Noem (R-S.D.), and the Marketplace Fairness Act of 2017 (S.976) (MFA), introduced by Sen. Mike Enzi (R-Wyo.) haven’t moved since they were referred to committees in 2017.

Noem fell short in a last-minute attempt to add a digital sales tax provision to a government spending bill March 23.

A bill seeking to codify Quill, the No Regulation Without Representation Act of 2017 (H.R. 2887) (NRRA), sponsored by Rep. Jim Sensenbrenner (R-Wis.), did receive a July 2017 House Judiciary subcommittee hearing. Many in the state and local tax community consider the House Judiciary Committee’s chairman, Rep. Bob Goodlatte (R-Va.), as one of the main obstacles to digital sales tax reform. Goodlatte is set to retire in November.

Voluntary Collection

Meanwhile, some companies have started to collect voluntarily in some states.

E-retailer Newegg, one of the companies represented in the Wayfair case, announced March 28 that it would begin collecting Connecticut sales and use taxes on July 1.

In March 2017, the Connecticut Department of Revenue Services announced that it would pursue an estimated $70 million a year in sales and use taxes that it contends online and other out-of-state sellers have evaded.

Throughout 2017, the department identified such retailers and sent them letters, demanding that the companies either turn over sales figures for 2014 through 2016, or agree to collect tax on in-state sales. If e-retailers chose to turn over their customers’ data, the state then sent demand letters to Connecticut taxpayers for the use tax owed for those three years, according to DRS spokesman Jim Carson.

‘Ratted’ Out

The department once made a similar move to collect unpaid use tax on out-of-state mail-order sales, Carson said. “As the economy has evolved, so have our tax collection efforts,” he told Bloomberg Tax.

Mark Nebergall, president of the Software Finance & Tax Executives Council (SoFTEC), told Bloomberg Tax that customers didn’t appreciate hearing from their state revenue departments about their failure to pay use tax.

“The Newegg experience seems to be the first data point we have on what e-retailers can expect in terms of customer backlash if they respond to the letter by providing the information instead of undertaking to collect and remit the tax,” Nebergall said. “They probably feel like the e-retailers ratted them out to the revenue department.”

Other Suits

Similar legal battles over digital sales tax regimes are pending in other states, where some parties have requested deferrals pending the Supreme Court’s decision in the South Dakota dispute. Lawsuits have been filed in Alabama, Indiana, Ohio, Tennessee, Virginia (over a Massachusetts regulation), and Wyoming.

A Louisiana District Court ruled March 2 that USA LLC owed local sales taxes to Jefferson Parish on third-party transactions made through its marketplace program. The court granted a suspensive appeal March 6.

States are increasingly considering regimes requiring marketplace providers, such as Inc., to collect tax on third-party marketplace transactions. Minnesota, Washington, Pennsylvania and Rhode Island enacted marketplace-provider regimes in 2017. In South Carolina, Amazon Services LLC is challenging a June 2017 assessment of nearly $12.5 million in uncollected taxes, penalties, and interest from third-party marketplace sales.

Liz Malm, director of strategic government relations and economist at the consulting firm MultiState Associates Inc, has told Bloomberg Tax that marketplace-provider legislation could spike once the U.S. Supreme Court reaches a decision in the South Dakota case. Assuming the court sides with South Dakota, Malm said she would expect marketplace-provider legislation to “be the biggest trend of 2019.”

The case is South Dakota v. Wayfair, Inc. , U.S., No. 17-494, brief on the merits filed 3/28/18 .

With assistance from Aaron Nicodemus in Boston

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

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

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