Last week the Supreme Court heard oral arguments in South Dakota v. Wayfair, the biggest sales tax case since 1992’s Quill Corp. v. North Dakota. In Wayfair, South Dakota is looking for the ability to require out-of-state retailers to collect tax on sales to South Dakota customers, despite the Supreme Court’s holding in Quill. Specifically, Quill holds that the U.S. Constitution’s Commerce Clause requires a retailer to have a physical presence in a state before the retailer can be made to collect and remit sales tax. As the sales tax world waits with bated breath to see whether Quill will survive, a comparison of the oral arguments in both cases show that the issues, concerns, and arguments before the highest court haven’t changed very much.
In Wayfair, South Dakota is arguing that the holding in Quill has led to an “unlevel playing field, where out-of-state remote sellers are given a price advantage” and “[s]mall [in-state] businesses are not being treated fairly.” The state has argued that the “rapidly growing” e-commerce market has made it difficult for states to collect the sales and use tax they are owed. Additionally, South Dakota claims that any problems with keeping track of such sales could be addressed with software, with some packages starting as low as $12 a month. Conversely, Wayfair’s representative, George Isaacson, focused on the cost and complexity of collecting sales tax in over 12,000 taxing jurisdictions and priced any potential software solutions at $250,000. Overturning Quill, Isaacson argued, would lead to “a marketplace free-for-all,” in large part because current software is limited in its ability to handle sales tax issues such as collecting exemption certificates.
In both Quill and Wayfair, advocates for the states sought to make the argument that the Court’s precedents had the effect of putting local businesses at a disadvantage and harming the states’ ability to collect revenue. North Dakota’s attorney general argued in Quill that Bellas Hess should be overturned because out-of-state companies are given a “competitive advantage” over in-state companies, which doesn’t reflect the “economic realities of selling today.” The combination of the “changing marketplace, the ease of communication ... and the fact that the collection burdens have gone down substantially because of technological developments” meant that the “world [is] a very different place in 1992 than it was in 1967 when Bellas Hess was decided.” Quill’s representative countered that overturning Bellas Hess would “destroy the interstate marketplace” in part because of the greater complexity which would result from having to account for sales tax in the “over 6,000 taxing jurisdictions” in existence at the time.
In both cases, the justices’ questions were focused on the burden of compliance, concerns over retroactivity, and whether they should hand the issue off entirely to Congress. In Quill, Justice Sandra Day O’Connor was particularly concerned with whether an opinion overturning Bellas Hess would open up retailers to retroactive application of sales tax laws, with North Dakota’s attorney conceding that retroactive liability could be “very substantial.” Justice Byron White, who also was in the majority in Bellas Hess, voiced concern about the complexity of accounting for sales tax collection for many jurisdictions, despite what he seemingly mocked as “all these marvelous computer developments around, so everybody knows everything about everything.” Faced with these issues, Chief Justice William Rehnquist seemed to echo many of his colleagues when he said that instead of attempting to solve these issues, “if Congress wants to change the result in Bellas Hess, it can do so.”
Fast forward several years, and the justices hearing Wayfair seemed to have many of the same concerns as their earlier brethren. Justice Sonia Sotomayor in particular was concerned by the additional complexity for businesses faced with having to collect sales tax in many more jurisdictions, pointedly asking, “[s]o what are we going to do with the costs that you’re going to put on small businesses?” Retroactivity was also a prime topic for the justices, which South Dakota sought to address by indicating that they have no desire to collect retroactively, nor do the 38 other states who have so indicated in amicus briefs. Many justices also seemed to wish to look across First Street towards Congress for an answer to these difficult questions, although Chief Justice Roberts said that “it would be very strange for us to tell Congress it ought to do something in any particular area.”
From Quill to Wayfair, the shift in time, technology, and Dakotas do not seem to have had much effect on the justices’ concerns. Will these concerns have an effect on the outcome? An opinion is expected by the end of June.
Continue the discussion on Bloomberg Tax’s State Tax Group on LinkedIn: How do you think the Supreme Court will rule in Wayfair?
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