Oral arguments in the biggest U.S. Supreme Court tax case in years are just days away.
After years of rejected petitions and scores of briefs, the April 17 oral argument looms, but there's still plenty to unpack.
The case is South Dakota v. Wayfair, which directly challenges the 1992 decision in Quill Corp. v. North Dakota, prohibiting states from imposing sales tax collection obligations on vendors lacking an in-state physical presence. The case has set off perhaps the largest amount of state and local tax-related activity in the past decade as states have tried to "kill Quill" as online commerce has replaced traditional brick-and-mortar markets.
Max Behlke, director of budget and tax at the National Conference of State Legislatures, has referred to South Dakota v. Wayfair as the "tax case of the millennium." A decision is expected by late June.
Heeding calls from traditional retailers and dozens of states that for years have attempted to circumvent Quill, the high court Jan. 12 accepted the case. They are reviewing South Dakota’s contention that the Quill ruling is obsolete in the e-commerce era and should be overturned. In Quill, which involved a mail-order company, the U.S. 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 last year found unconstitutional under Quill.
Bloomberg Tax talked to state and local tax lawyers and policy experts about some of the most burning questions ahead of the April 17 oral arguments.
Both South Dakota and the e-retailers have submitted multiple rounds of briefs to the court. There have also been 23 briefs filed in support of the e-retailers and 14 in support of South Dakota. Each party is allotted 30 minutes to argue April 17, and South Dakota has deferred 10 minutes of its argument time to U.S. Solicitor General Noel Francisco. President Donald Trump has been outspoken about wanting Amazon, Inc. to pay state and local taxes.
Richard D. Pomp, the Alva P. Loiselle Professor of Law at the University of Connecticut School of Law, told Bloomberg Tax he expects the parties to repeat the positions from their briefs.
For South Dakota, this means a focus on the rapid advancement of internet commerce since the Quill decision and the ever-increasing sales tax revenue deficit faced by states. The e-retailers will rely on stare decisis—the legal principle that favors maintaining current precedent—and will condemn what they see as burdensome compliance costs from having to collect in multiple states based on varying definitions of what is taxable.
"I expect South Dakota to take a more legal approach in their arguments and for the e-retailers to favor a policy approach, as they will argue that small and medium-sized businesses will face a burden too great to overcome and that compliance costs are gravely underestimated," Joe W. Garrett Jr., deputy commissioner for the Alabama Department of Revenue, told Bloomberg Tax.
Both parties have referenced the role of Congress in potentially codifying or overturning Quill, but the e-retailers, and those supporting their position, argue that Congress, not the court, should tackle the digital tax issue. The high court itself in Quill said Congress was best suited to resolve the issue. But will the court recognize Congress' power?
"The role of Congress must be a part of the court's decision making, but the sad fact of the matter is that Congress has never taken up the issue," he said. "It's a tough area for Congress. There's no political reason for the body to get involved. Expanding taxing jurisdictions is never a popular thing for lawmakers to do."
Despite the demand that Congress wade into the issue, there's been deadlock on the Hill for years as bills have languished.
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 in this latest congressional term.
Noem previously told Bloomberg Tax that Congress needs to pass legislation before the Supreme Court reaches a ruling in the case. 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 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.
Reactive, Not Proactive
For years there’s been a frenzy of state-side activity to adopt varying regimes to expand state tax collection authority over online sales, whether through notice-and-reporting laws, revised nexus thresholds based on sales figures, or the latest trend: laws placing collection duties on Amazon.com Inc.-type marketplace providers on behalf of third-party sellers on their platforms.
So what would happen to those laws, and states' collection authority, if the high court undoes Quill?
Multiple lawyers have said the court must establish a threshold or guidelines for states if it overturns Quill.
"I think this is the most important and unsettled issue," Garrett said. "I fear that if the Court overturns Quill in a blanketed fashion, without a threshold, it could result in fast action from Congress to establish a restrictive threshold, which would hurt states."
Garrett said he isn't at all in favor of limiting state power, but that a threshold could keep Congress at bay and still allow for tax revenue increases.
Jennifer Karpchuk, state tax attorney at Chamberlain Hrdlicka in Philadelphia, told Bloomberg Tax that while a threshold is crucial, it puts the court in a difficult position.
"You can't have a free-for-all, or a situation where all retailers can instantly be taxed in any jurisdiction, but establishing a threshold, or any similar decision, will be tough for the court, as they want to remain a judicial body, not a legislative one," she said.
Karpchuk said a reversal of Quill without an established threshold could force Congress to take action.
"Congress is a reactive body, more than it is a proactive one," Karpchuk said. "Any decision involving the reversal of Quill could see Congressional action, but if Quill is codified, I don't think we're likely to see Congress step in."
Retroactivity: Pitchfork Protests?
Retroactive tax liability is among the case's most contested topics, but Pomp doesn't think the U.S. Supreme Court would allow retroactivity because "justices understand that this decision affects the entire country, not just one or two states."
Brian Kirkell, a Washington-based principal at RSM US LLP, said any push for retroactive legislation at the state level would result in "protests at the pitchfork level and other great ramifications," and that it "would just be an absolute mess for states."
However, Erik Jaffe, an appellate litigator who authored a brief in favor of the e-retailers for the Competitive Enterprise Institute, told Bloomberg Tax that retroactive measures are inevitable.
"What state is going to be screaming against this? Last time I checked, lawmakers don't care about levying a tax against those outside of their state, against those who can't even vote for them," Jaffe said.
But Why Now?
It's been 26 years since the Court ruled in Quill and efforts to topple the rule have been ongoing almost since day one. So why is 2018 the right time to revisit the issue? There's a handful of reasons, Kirkell said.
"I guarantee each of the justices have ordered something off Amazon. They understand the great advancement of technology, and that much of the brick-and-mortar economy they've known their entire lives in crumbling," he said.
Garrett suggested that Justice Anthony Kennedy, nearing rumored retirement, has loose ends he wishes to tie up. And this case, and Quill's continued relevancy, is one of them.
"Kennedy could see the Wayfair case as an opportunity to fix a past mistake before he retires," Garrett said. "Plus with the addition of Gorsuch, who once clerked for Kennedy, a ruling to undo Quill could illustrate a new tax standard as one career ends and the other begins."
Kennedy authored a 2015 concurrence in Direct Marketing Association v. Brohl calling for a case that provides the opportunity to re-evaluate Quill. The concurrence was the major spark for the "kill-Quill" movement. Neil Gorsuch, the newest addition to the bench in 2017, has indicated in a past opinion that Quill may be dated.
The Dakotas Are Alright
And what's with the Dakotas and cross-border taxation? North Dakota was the state of record in Quill, and now South Dakota could be the state to undo it.
Both states' relatively small economies and reliance on use taxes are a big reason, Pomp said.
"Both states have small populations spread over great distances. I would imagine North and South Dakotans order a significant amount of products online, to save time," Pomp said. "Also, litigation happens to move quickly in each state."
South Dakota is the fifth least populated and least dense state. North Dakota is fourth in both categories.
"I often joke 'what's the middle Dakota going to do?'" Kirkell said.
Kirkell noted that it easily could have been one of the other states with similar pending litigation—Alabama, Indiana, Ohio, Tennessee, Virginia (regarding a Massachusetts regulation), and Wyoming—to reach the high court. South Dakota just happened to be first. The state law did call for expedited judicial review.
The U.S. Supreme Court case is South Dakota v. Wayfair, Inc., U.S., No. 17-494, oral argument scheduled 4/17/18.