Supreme Court takes up battle between states, web retailers over sales tax

Supreme Court justices Tuesday seemed apprehensive about overturning a 1992 high court decision that says retailers do not have to collect state sales taxes if they have no physical presence in that state.

South Dakota's attorney general, Marty Jackley, told the court that the rule imposed by Quill Corporation v. North Dakota is hurting his and other states.

“Our states are losing massive sales tax revenues,” Jackley said, adding “our small businesses on Main Street are being harmed because of the unleveled playing field created by Quill, where out-of-state remote sellers are given a price advantage.”

Justice Sonya Sotomayor was concerned that overturning Quill would introduce “a whole new set of difficulties.”

And Justice Elena Kegan suggested this was an issue for Congress, telling Trump administration Deputy Solicitor General Malcolm Stewart “Congress can craft a compromise in ways we cannot.”

Chief Justice John Roberts, citing briefs, said, “This is a problem that has peaked” because “bigger e-commerce companies already find themselves with a physical presence in all 50 states.”

The justices also worried about the economic impact on small companies that do business on the internet.

“I'm talking about the added cost of doing business for the small businessman, someone – one of the briefs said it was a $250,000 cost to implement one of these sales programs, one of these sales tax programs,” Justice Sotomayor told South Dakota's Jackley.

Chief Justice Roberts wanted to know if there were protections for the small business person, “a small business using the Internet may have greater burdens than Amazon and, therefore, they have a constitutional claim under your position, or, under your position, can the states impose the burdens on any -- any micro-business?”

But Justice Neil Gorsuch asked Wayfair's lawyer, George Isaacson, why the court should favor “a particular business model that relies not on brick and mortar but on mail order?”

An outcome in this case is expected by the end of June.

Below, Kimberly Jansen, a partner at Hinshaw & Culbertson LLP, gives her analysis on South Dakota v. Wayfair:

How did the case get to the Supreme Court?

Many states, though not all, impose a sales or use tax on the sale of goods or services. Typically, states require the retailer to collect the tax from consumers at the time of the transaction and remit the amount collected to the state.

The difficulty comes when an out-of-state retailer makes a sale to in-state consumers. Can a state require an out-of-state retailer to collect the sales tax on behalf of the state? Historically, and considered in the context of mail-order retailers who shipped goods from out-of-state to in-state consumers, the answer was a firm “no.”

The issue was directly addressed most recently in Quill Corp. v. North Dakota in 1992. In Quill, the Supreme Court reaffirmed that the dormant commerce clause prohibits a state from requiring an out-of-state retailer to collect and remit a state sales tax if the retailer has no physical presence there.

Frustrated with the impact of Quill on their revenue collection, states then got a boost from Justice Kennedy in 2016. In a separate concurring opinion in Direct Mktg. Ass’n v. Brohl, Kennedy criticized Quill and suggested the time had come for a case that would allow the court to re-examine its holding in Quill.

That same year, South Dakota followed Kennedy's suggestion by passing a law that would require any retailer transacting more than $100,000 in business in South Dakota or making more than 200 sales to consumers there to collect and remit the South Dakota sales tax; it didn't matter, according to the new law, whether the retailer had a physical presence in the state.

South Dakota then promptly filed a declaratory judgment action seeking a determination of the statute’s validity. Following Quill, South Dakota courts concluded that the new law violates the commerce clause.

The Supreme Court granted certiorari to re-examine Quill.

What question(s) are the justices being asked to decide?

The Court is being asked to decide whether the physical presence requirement embraced in Quill remains an appropriate test in the new age of the internet.

Why is this case important?

For the average American, the potential significance of this case is simple: if the Supreme Court overrules Quill, consumers will no longer be able to take advantage of those “sales tax-free” purchases on the internet.

Many retailers already collect state sales taxes, either voluntarily or because they have a physical presence in-state, so this impact might not be as noticeable to consumers as it was when internet commerce was new and seemingly few sales included state sales taxes.

Many states believe the outcome of the case could have a substantial impact on state revenues. Overruling Quill, these states believe, will allow them to collect billions of dollars in sales tax that would otherwise remain uncollected under the rule in Quill.

But retailers believe that overruling Quill will force retailers to comply with thousands of complex and variable state and local sales tax regimes. That burden, they urge, will fall most heavily on small businesses.