Wayfair, Overstock Urge High Court to Deny Digital Tax Case

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By Ryan Prete

South Dakota has “manufactured an entirely inappropriate vehicle” for the U.S. Supreme Court to reconsider its 25-year-old decision restricting states’ ability to tax remote retailers, according to online retailers challenging the state’s digital tax law.

The Dec. 7 brief in opposition—from e-commerce companies Wayfair Inc., Overstock.com Inc., and Newegg Inc.—argued that the high court should deny South Dakota Attorney General Marty Jackley’s (R) request for review of a state Supreme Court ruling that found the state’s “economic nexus” law, S.B. 106 (codified as S.D. Codified Laws Chapter 10-64), unconstitutional under Quill Corp. v. North Dakota—the 1992 Supreme Court ruling that prohibits states from imposing sales and use tax collection obligations on vendors without a physical presence in-state.

Through a “fast track” appeal, South Dakota is enlisting the Supreme Court to “provide what amounts to an advisory opinion on a barren factual record, contrary to this Court’s proper constitutional role and its carefully-circumscribed jurisdiction,” according to the retailers’ brief.

“In the process, the State runs roughshod over principles of stare decisis, disregards significant concerns of retroactive liability, and fails to establish facts sufficient for this Court to evaluate the complex and delicate balance between the burdens of imposing nationwide sales and use tax obligations on interstate businesses, on the one hand, and the States’ interest in requiring companies located beyond their borders to serve as the States’ use tax collectors, on the other,” the brief stated.

The response follows a flurry of 15 friend-of-the-court briefs supporting South Dakota’s petition, according to the Supreme Court’s website. At least six briefs backing the online retailers’ opposition brief were filed Dec. 7—one brief filed on behalf of several congressional members included Reps. Jim Sensenbrenner (R-Wis.) and Bob Goodlatte (R-Va.), who have both supported federal legislation to codify the Quill physical presence rule.

The lawyers representing the retailers didn’t immediately respond to a request for comment.

‘Leave it to Congress’

“Congress is the proper institution to address this complex issue,” the online retailers argued, highlighting three bills pending in Congress:

A bipartisan coalition of U.S. senators and representatives—including Sensenbrenner and Goodlatte, sponsor and co-sponsor of the NRRA, respectively—likewise argued that “since the states refuse to solve their use tax collection problem themselves, the only provident decision for this Court to take is to deny the petition and leave it to Congress to pursue its fuller and more appropriate means of arriving at a solution.”

Many individuals, both inside and out of Congress, have singled out Goodlatte as the primary roadblock to e-commerce proposals expanding states’ taxing authority. Goodlatte, who chairs the House Judiciary Committee, announced Nov. 9 that he won’t seek re-election in 2018.

Fact-Free Case

Both the online retailers and other parties argued that there are factual flaws with South Dakota’s claims.

“The State’s fundamental premise for why Quill should be revisited is that circumstances in the retail marketplace have dramatically changed since Quill was decided,” according to the retailers’ brief. “Instead, accepting that Quill controlled the outcome, the State conceded summary judgment in order to press this appeal. As a result, there is no record on which this Court can evaluate the continuing vitality of the Quill standard.”

NetChoice, a Washington-based internet commerce trade association, also claimed that South Dakota’s argument lacks factual evidence.

“Petitioners present no facts regarding the burden (or lack thereof) of multistate sales and use tax collection on interstate commerce,” according to NetChoice’s friend-of-the-court brief. “South Dakota’s ‘legal argument’ consists largely of its own opinion, without factual evidence to support, that changes in computer technology, streamlined sales and use tax laws, and the evolution of the retail industry have made Quill obsolete,”

NetChoice’s general counsel echoed the association’s concern over South Dakota’s “fact-free” argument.

“South Dakota continues to disregard Supreme Court precedent and masquerade opinions—without facts to support them—as legal arguments,” Carl Szabo, NetChoice vice president and general counsel, said in a statement emailed to Bloomberg Tax. “South Dakota rushed to the Supreme Court but forgot to bring any facts. It is clear that only the U.S. Congress has the legislative power to enact internet taxation. This is nothing but an attempted illegal power grab by the state of South Dakota.”

Chances of Review

Despite the significant volume of briefs filed—including a brief filed by a coalition of 35 states and the District of Columbia in support of South Dakota’s petition—it’s still not certain that the high court will grant review.

“I think that short of Bush v. Gore, there is nothing that the Supreme Court will surely take up,” Jamie Yesnowitz, principal and state and local tax practice and National Tax Office leader at Grant Thornton LLP, told Bloomberg Tax.

Yesnowitz gave the high court a 25 percent chance of granting review, a figure he called “relatively high.”

“Well, I was pretty skeptical at first, but now I’m convinced that Wayfair has a decent chance of being granted,” Lila Disque, deputy general counsel for the Multistate Tax Commission, told Bloomberg Tax. “I think the most compelling fact is that so many states signed on to an amicus brief together. This really emphasized the importance of the case and the need for a standard that better reflects the modern workplace.”

Other Briefs Filed

Bloomberg Tax received additional briefs from the following groups:

  • National Taxpayers Union Foundation. The brief argued that the “case’s failure to consider due process concerns and its narrow record render it an inappropriate vehicle for abrogating Quill,” and that a denial would allow Congress to consider other policy options.
  • American Catalog Mailers Association. The brief argued that the “continuing reliance interest of the mail order industry properly warrants retention of the physical presence standard until a meaningful substitute can be implemented.”
  • Former U.S. Rep. Chris Cox (R-Calif.), co-author of the Internet Tax Freedom Act. The brief argued that the “Internet Tax Freedom Act (ITFA) specifically prohibits multiple and discriminatory taxation of internet commerce.”
  • Americans for Tax Reform. The brief argued that “accepting this case would encourage unconstitutional state action and threaten the rule of law,” and that Congress should address the policy considerations addressed in Quill.

The case is South Dakota v. Wayfair, Inc. , U.S., No. 17-494, respondents’ brief in opposition filed 12/7/17 .

To contact the reporter on this story: Ryan Prete in Washington at rprete@bloombergtax.com

To contact the editor responsible for this story: Cheryl Saenz at csaenz@bloombergtax.com

For More Information

Text of the opposition brief is at http://src.bna.com/uMQ.

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