South Dakota Rebuffs E-retailer Concerns in Last High Court Brief (1)

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By Ryan Prete

South Dakota reiterated that the physical-presence rule is indefensible in a final submission advocating for the U.S. Supreme Court to overturn a sales tax law that limits states’ authority to tax online purchases.

South Dakota’s April 9 reply brief is the last filing before April 17 oral argument in South Dakota v. Wayfair, a challenge to the 1992 decision in Quill Corp. v. North Dakota prohibiting states from mandating remote retailers collect sales tax. Practitioners expect the high court will issue a decision by late June.

The state argued that “the physical-presence rule is an isolated and outdated doctrinal error” and that the e-retailer respondents—Wayfair Inc., Newegg Inc., and Inc.—have overstated the costs of nationwide compliance.

“The heart of respondents’ argument is thus neither dormant-commerce-clause caselaw nor even stare decisis jurisprudence, but rather an extended tax-policy argument that it remains too hard for e-commerce retailers to collect local sales taxes,” according to South Dakota’s brief. “This is a non sequitur: Respondents do not attempt to explain how physical presence limits—or even relates to—the compliance costs they decry.”

Lila Disque, deputy general counsel for the Multistate Tax Commission (MTC), lauded the reply brief.

“It’s a very competent reply brief, and I was impressed by their use of facts and statistics to counter Wayfair’s claims,” she told Bloomberg Tax. The MTC was one of a dozen organizations to file friend-of-the-court briefs in favor of South Dakota.

Deadlock on Hill

The e-retailers have argued, in part, that Congress, rather than the high court, is the proper body to address the issue. South Dakota addressed these concerns in the brief, but said that “respect for Congress’s role requires abrogating the physical-presence rule.”

“Respondents’ position is that this Court should retain Quill and continue directing lower courts to strike down every single state law that does not meet the physical-presence requirement, no matter how reasonable, until a federal bill saying otherwise obtains bicameral and presidential approval,” according to South Dakota’s brief. “This is the literal opposite of leaving the matter to Congress.”While Congress has proposed several measures targeting digital sales taxation, legislative efforts on the Hill have remained deadlocked.

Rep. Kristi Noem’s (R-S.D.) Remote Transactions Parity Act of 2017 (H.R. 2193) and Sen. Mike Enzi’s (R-Wyo.) Marketplace Fairness Act of 2017 (S.976), both which seek to undo Quill, haven’t moved since their introduction.

Noem previously told Bloomberg Tax that Congress needs to pass legislation before the Supreme Court reaches a ruling in South Dakota v. Wayfair. 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.

On the opposite end of the spectrum is the No Regulation Without Representation Act of 2017 (H.R. 2887), sponsored by Rep. Jim Sensenbrenner (R-Wis.)—which would, in part, codify Quill’s physical-presence standard. The bill received a House Judiciary subcommittee hearing in July 2017, but hasn’t moved since then.

Refuting Retroactive Claim

South Dakota also disputed the e-retailers’ assertions that states will push for retroactive tax collection on online sellers if the Quill standard is overturned.

“As the 44 attorneys general supporting petitioner note, however, there would be substantial constitutional barriers to their pursuit of retroactive enforcement under multiple doctrines,” South Dakota argued, referring to a brief filed by Colorado and 40 other states, two U.S. territories, and the District of Columbia.

“The States are self-evidently hoping for prospective compliance, not trying to snatch up back taxes,” South Dakota’s brief continued. “And that is because the States know that, with or without Quill, unreasonable actions in this realm will precipitate swift condemnation from Congress or from this Court’s ordinary dormant commerce clause doctrines.”

Jeffrey Friedman, a tax partner at Eversheds Sutherland (US) LLP in Washington, told Bloomberg Tax he found the state’s claim that there are safeguards in place to prevent retroactive application of a new constitutional standard to be “dismissive and convenient.”

“While some states have shown restraint in seeking back taxes, including through legislative restrictions, other states regularly apply laws retroactively,” Friedman said. “Taxpayers should be concerned about whether a new standard would be applied to back years. And the states should issue binding authority that commits them to not doing so.”

The reply brief was filed after 23 friend-of-the-court briefs in favor of the e-retailers were filed in late March and early April. Several briefs favoring South Dakota were filed in early March.

The case is South Dakota v. Wayfair, Inc. , U.S., No. 17-494, reply brief filed 4/9/18 .

Updated with changes throughout.

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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