Senator Ted Cruz Leaps Into Digital Sales Tax Fray

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By Jennifer McLoughlin

A U.S. Supreme Court decision overturning its 26-year-old rule restricting states’ taxing authority over out-of-state sellers would “thwart ongoing congressional efforts to find a workable solution to the remote sales tax issue.”

Sens. Ted Cruz (R-Texas), Steve Daines (R-Mont.), and Mike Lee (R-Utah) made that argument in a brief filed late April 4 in South Dakota v. Wayfair, joining other federal lawmakers, companies, and policy groups calling for the high court to preserve the 1992 Quill Corp v. North Dakota decision. Under that opinion, a vendor must have an in-state physical presence before it’s obligated to collect sales tax.

“Overturning Quill would upset ongoing negotiations in the Legislative Branch,” the senators argued in the brief. “If states could tax spending on interstate online purchases, they would immediately take advantage of this newfound power. This in turn would reduce incentives for a workable compromise and lead to states and cities engaging in the very sorts of protectionist activities the Commerce Clause sought to prevent.”

Twenty-three briefs have been filed since late March in favor of e-retailers Wayfair Inc., Newegg Inc., and Inc., which are contesting a South Dakota statute enacted to prompt a Supreme Court appeal that upends the Quill physical-presence rule. Signed into law March 2016, S.B. 106 mandates sales tax collection from retailers with annual in-state sales exceeding $100,000 or 200 separate in-state transactions.

Oral argument is scheduled for April 17, and practitioners expect a decision by late June.

Multiple Proposals

Cruz and the senators argued that “Congress alone has the constitutional expertise and authority to address changes to the national economy of the last twenty-five years.” They identified three bills pending on the Hill:

The lawmakers acknowledged that the House hasn’t passed a version of the RTPA, but argued that “this only demonstrates that the House has not come yet to an agreement, not that it is numb to the issue. The Constitution intentionally structured the legislative branch so that it would not move too quickly, and the House is merely meeting that expectation.”

Furthermore, historical attempts to address digital sales taxes demonstrate that “this is not an issue that Congress is ignoring, just now considering, or considering half-heartedly,” according to the brief. Rather, Congress consistently looked at the issue—but simply hasn’t come to an agreement.

Trump Chimes In

However, the U.S. Solicitor General has argued that “Congress’s authority to legislate in this area should not dissuade the Court from limiting or overruling Quill.”

“As the course of this litigation illustrates, Quill has been widely understood to establish a ‘physical presence’ rule under which an e-commerce retailer’s pervasive Internet presence in a State is an insufficient ground for imposition of state-tax-collection duties,” the Solicitor General said in a March 5 brief supporting South Dakota. “If (as we argue above) Quill’s actual holding is more limited, this Court’s clarification of that fact will serve a valuable function, both by assisting the States in the administration of their tax laws and by informing Congress of the applicable default rule as it considers these issues further.”

President Donald Trump referred to the pending Supreme Court case April 5, telling reporters aboard Air Force One that he’s going to “take a very serious look” at Inc. and what he said is an “uneven playing field” the retailer enjoys against competitors.

“You look at the sales tax situation which is going to be taken up I guess very soon, there’s going to be a decision from the Supreme Court,” Trump said. “So we’ll see what happens. The Post Office is not doing well with Amazon that I can tell you.”

Previously, Treasury Secretary Steven Mnuchin said Feb. 15 during a hearing before the House Ways and Means Committee that he had spoken personally with Trump about online taxation, and that the president “does feel strongly” that sales tax should be applied to internet purchases.

Holding Pattern

Several state tax practitioners have said that time has expired for a federal solution, after several congressional proposals fell into a holding pattern before dying during previous sessions. Most recently, Noem 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 Donald Trump March 23.

Many members in the state and local tax community have singled out House Judiciary Chair Bob Goodlatte (R-Va.) as the biggest hurdle to e-commerce reform. In a Goodlatte-led bipartisan submission supporting the e-retailers in the South Dakota dispute, Senate and House members argued that “Congress is institutionally best situated to address the issues in this litigation.”

“If this Court rewards South Dakota for intentionally violating its rulings, overturning the settled precedent of Quill and opening the way for the next wave of extraterritorial regulatory expansion by the States, there will no longer be any incentive for the States to simplify their sales and use tax regimes for interstate sales,” the lawmakers argued. “Yet that is something Congress, and the Advisory Committee on Electronic Commerce which it established, have been encouraging them to do for many years. The result will be needless continuation of these already too-burdensome compliance impositions, multiplied more than a thousandfold once every tax jurisdiction in America is greenlighted to levy and enforce its own idiosyncratic system far beyond its borders.”

This appeared to counter an earlier brief supporting South Dakota, filed by Enzi, Heidi Heitkamp (D-N.D.), Lamar Alexander (R-Tenn.), and Richard J. Durbin (D-Ill.). While the brief argued for the undoing of Quill, it also said “Congress is fully prepared to act when needed.”

“Amici are filing this brief to demonstrate that overturning Quill will not leave respondents and other out-of-state sellers without a Dormant Commerce Clause defense and to assure the Court that Congress stands fully prepared to step in if other states or localities, unlike South Dakota, seek to impose excessive burdens on out-of-state retailers that become obligated to collect sales and use taxes,” according to the brief.

Wave of Briefs

As of press time on April 5, other submissions supporting the e-retailers include those filed by:

The case is South Dakota v. Wayfair, Inc. , U.S., No. 17-494, friend-of-the-court briefs filed 4/4/18 .

With assistance from Jennifer Epstein (Bloomberg) in Washington

To contact the reporter on this story: Jennifer McLoughlin in Washington at

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

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