U.S. Supreme Court Will Hear Pivotal Digital Tax Case

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By Ryan Prete

The U.S. Supreme Court will revisit a 26-year-old ruling that prohibits states from imposing sales and use tax collection obligations on vendors without a physical presence in-state.

Heeding calls from traditional retailers and dozens of states, the high court Jan. 12 granted review of South Dakota’s contention that the 1992 ruling in Quill Corp. v. North Dakota is obsolete in the e-commerce era and should be overturned. In Quill, which involved a mail-order company, the Supreme Court invoked the so-called dormant commerce clause, a judge-created legal doctrine that bars states from interfering with interstate commerce unless authorized by Congress.

E-retailers Wayfair Inc., Overstock.com Inc. and Newegg Inc. have challenged South Dakota’s digital sales tax statute, S.B. 106 (S.D. Codified Laws Chapter 10-64), which the South Dakota Supreme Court found unconstitutional under Quill—the decision that triggered South Dakota’s appeal to the U.S. Supreme Court.

South Dakota passed its law in 2016 with an eye toward overturning the Quill decision. Several states have followed South Dakota’s “kill Quill” approach, enacting similar “economic nexus” laws to enforce sales tax collection obligations on remote retailers with annual in-state sales exceeding $100,000 or 200 separate in-state transactions.

“We are pleased that the court has taken the next step in leveling the playing field for Main Street businesses across America,” state Sen. Deb Peters (R), who is also president of the National Conference of State Legislatures, said in a statement e-mailed to Bloomberg Tax. Peters was a principal author of South Dakota’s digital sales tax statute.

“NCSL has long supported marketplace fairness as states are losing tens of billions of dollars per year in uncollected sales taxes,” she said. “These taxes fund education, public safety, and the innumerable services that state governments provide. We are pleased the process is moving forward quickly and anticipate the U.S. Supreme Court will ultimately restore fairness to Main Street businesses and states.”

‘Kill Quill’ Movement

The growing “kill Quill” movement launched after Justice Anthony Kennedy submitted his 2015 concurrence in Direct Marketing Association v. Brohl, calling for a case that provides the opportunity to re-evaluate Quill. Optimism for the Supreme Court accepting a Quill challenge was buoyed with Justice Neil Gorsuch joining the bench in 2017—a judge who has indicated in a past opinion that Quill may be dated.

South Dakota has argued that the Quill decision is out of place in the modern digital economy.

“The retail landscape significantly changed with the inception of the internet and access to online shopping. Federal law currently shields out-of-state businesses from remitting the same taxes as South Dakota businesses. Today the State asks the U.S. Supreme Court to level the playing field,” South Dakota Attorney General Marty Jackley (R) said in an October 2017 press release.

However, the companies contesting South Dakota’s digital sales tax have countered that Congress is the proper body to change the Quill physical-presence standard.

In a statement e-mailed to Bloomberg Tax, Brann & Isaacson said the law firm believes the Supreme Court “will recognize that South Dakota’s demand that Quill be overruled is untenable and without merit.” Brann & Isaacson serves as counsel for the e-retailers in the South Dakota case.

“We fully expect the Court will conclude once again, as it did in Quill, that Congress is the proper body to address the complex question of sales tax collection on Internet, catalog, and other remote sales, and defer to Congress’ exercise of its Commerce Clause powers to enact legislation that requires simplification of state taxes as a condition for any expansion of state taxing authority,” according to the law firm’s statement. “Congressional action to protect the free flow interstate commerce is critical to the health of the national economy. We look forward to briefing the issues for the Court.”

At Stake for States

A recent U.S. Government Accountability Office report found that state and local governments might have gained approximately $8 billion to $13 billion in 2017 if states were given authority to require sales tax collection from all remote sellers. The report described the estimate as between 2 to 4 percent of total 2016 state and local government general sales and gross receipts tax revenue.

The GAO further estimated that under current law, states can require remote sellers “to collect about 75 to 80 percent of the taxes that would be owed if all remote sellers were required to collect tax on all remote sales at current rates.”

John Buhl, media relations manager at the Tax Foundation, told Bloomberg Tax that the decision reflects the court’s understanding that “e-commerce has continued to evolve and that outdated state sales tax rules have resulted in an unlevel playing field, with different retail sales subject to different treatment.”

“We believe that South Dakota’s sales tax law meets the requirements of the dormant commerce clause, but other states with more complex laws would impose a greater burden on interstate commerce,” Buhl said. “A ruling in this case could answer some key questions while also reasserting necessary limits on state taxing authority.”

Watch Closely

Jamie Yesnowitz, a principal and national tax office leader at Grant Thornton LLP, said it’s important to watch for what the high court examines in the case.

“We look forward to seeing how the Court will handle both the procedural and substantive aspects of the case. Specifically, will the Court address whether the method by which the case got to the Supreme Court (via a legislative statute designed to challenge an existing Supreme Court precedent) was proper?” Yesnowitz told Bloomberg Tax in an email.

“If the Court is fine with how the case got there, will the Court decide to overrule this precedent on the grounds that a physical presence rule is not workable in an electronic-based economy? Or will the Court uphold Quill and suggest, as it did in Quill, that this is an issue for Congress to decide? A lot of fascinating questions to consider here.”

Lila Disque, deputy general counsel for the Multistate Tax Commission, told Bloomberg Tax there was a “mixture of surprise and excitement in the MTC’s office.

“We’re all looking forward to seeing how this case develops and whether we finally get some resolution to the outdated physical presence standard,” she said.

Trade Associations React

Steve DelBianco, president and CEO of NetChoice, a Washington-based internet commerce trade association, told Bloomberg Tax that while today’s decision wasn’t the one his organization wanted, he’s glad “the nation’s nighest court will learn new state laws are imposing unreasonable tax burdens on out-of-state businesses.

“On our side are Supreme Court precedent and the US Constitution, so we look forward to airing the concerns of America’s small businesses,” DelBianco added.

Andrew Moylan, executive vice president of the National Taxpayers Union Foundation, said South Dakota’s aggressive attempt to assert tax authority over online businesses will lead to a rough path for the state.

“The state will need to overcome the constitution’s plain language leaving matters of interstate commerce to Congress, decades of precedent limiting the exercise of sales tax power within its own borders, and the fact that their law does not even attempt to meet the burdens of due process,” Moylan said in a statement.

Retail Industry Lauds Decision

Deborah White, senior executive vice president and general counsel at the Retail Industry Leaders Association, said the decision acts as an important signal for retailers that invest in storefronts and jobs in local communities.

“Retailers hope that the Court will ultimately conclude that the economic-nexus standard is a more appropriate way to decide today which retailers must collect sales tax than the physical-presence test created more than a half century ago,” White said in a statement e-mailed to Bloomberg Tax. “In doing so, the Court will validate efforts by the states to treat community and absentee retailers equally when they conduct business with consumers in their state.”

The case is South Dakota v. Wayfair, Inc. , U.S., No. 17-494, petition for review granted 1/12/18 .

With assistance from Greg Stohr in Washington (Bloomberg)

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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