South Dakota got a rare chance to argue before the U.S. Supreme Court why all retailers, online or off, should be subject to a state’s sales tax — but the justices aren’t sure they’re the best group to decide this decades-old debate.
During an hour of oral arguments on Tuesday, the court came back repeatedly to the question of whether Congress is better suited to untangle the mess that is state sales taxes as applied to online and brick-and-mortar retailers, laid bare by South Dakota’s lawsuit against a trio of online companies — Wayfair, Overstock.com and Newegg. South Dakota wants the companies to submit to a new state law forcing them to remit sales tax, even without any “physical presence” in the state, something called for by the Supreme Court’s 1992 ruling in Quill Corp. v. North Dakota.
South Dakota Attorney General Marty Jackley early in his arguments echoed some recent criticism by President Trump of Amazon, noting the “unlevel playing field” created by the Quill ruling, especially as e-commerce has rapidly gained market share over the last several years. He also pointed out that, despite this growth, Congress hasn’t stepped in with new legislation to solve the disparity.
Justice Elena Kagan wasn’t convinced. “Usually, when somebody says something like that…it gives us reason to pause because Congress could have addressed the issue and Congress chose not to. This is not the kind of issue where you [can] say: ‘Well, probably it didn’t get on Congress’ radar screen or maybe Congress was busy doing other things.’”
Kagan described the issue as “very prominent,” putting Jackley’s argument for Supreme Court intervention at a higher bar, and said Congress has the power to craft a compromise on the issue “in ways that we cannot.”
Jackley attempted to position Congress’ inaction as simply a lack of incentive, because the federal government won’t be the party benefiting from the tax collection if legislation requiring online sellers to collect and remit state sales tax was enacted.
“As things stand now, it seems that both the states and Internet retailers have an incentive to ask for a congressional solution to this problem,” Justice Stephen Breyer added.
Breyer was one of the most involved justices in the arguments and many of his inquires centered around small business, and what effect the overturning of the court’s Quill decision would have on them.
Ensuring that small business see the Internet as a relatively easy market to enter is one of the hopes “of preventing oligopoly, etc.,” Breyer said. Should small retailers selling across state lines find themselves with additional taxes, he worried that would raise barriers to entry and further reduce competition.
But the estimates of how much it would actually cost a given company to get a system in place to begin dealing with state sales tax varied wildly between South Dakota’s starting cost of $12 and the trio of retailers, which put it at an estimated typical cost of $250,000.
“I don’t know if it’s a little or if it’s a lot,” Breyer said. “And if it is a lot, there might be ways of putting minimums in that would, in fact, preserve the possibility of competition and the possibility of new entry, stopping the entry barriers from rising too high. Now that’s something the Antitrust Division [of the Justice Department] could testify about, but they’re not going to testify here. And so that’s the kind of problem that worries me.”
It was also not totally clear what would be deemed sufficient nexus to a state to trigger an e-tailer’s compliance with a local tax. The “minimum” referenced by Breyer was related to some brief back-and-forth of whether a dollar amount of sales, a number of sales or some other measure should be used as a determinant. Under South Dakota’s law, the trigger is either $100,000 in sales or 200 transactions in the state.
Malcolm Stewart, deputy solicitor general for the Justice Department, didn’t exactly assuage any concerns for small business when, arguing on behalf of the U.S. as an amicus curiae, or an impartial adviser, said the time between a possible overturning of the Quill ruling and likely congressional action could be bad for retailers.
“I have no doubt that if the court issued that ruling, many states would adopt regimes that are less hospitable to retailers, unless they were stopped from doing that by Congress,” Stewart said.
That hypothetical, as well as the potential chaos of holding every retailer doing intrastate online business to individual tax jurisdictions, were the arguments used by the retailers’ counsel, George Isaacson, in support of leaving the Quill decision in place until Congress acts.
“The notion of a chaotic period preceding Congress coming in to address the issue is as daunting as any in terms of what the consequence of overruling Quill would be,” Isaacson said.
“For too long, giant online sellers have held a distinct advantage over local brick-and-mortar stores,” Deborah White, general counsel for RILA, said.
“We are very hopeful that the reason the justices have agreed to hear this case is that they want to update a ruling that has become antiquated in the light of developments over the past quarter-century,” Matthew Shay, chief executive of the NRF, said.
But the potential for chaos in the courts was also a concern for Justice Sonia Sotomayor, who said at the beginning of the session: “I’m concerned about the many unanswered questions that overturning precedent will create a massive amount of lawsuits about.”
One overarching question that didn’t seem to be at issue was whether the determination in the Quill case was aligned with today’s retail landscape.
Justice Ruth Bader Ginsburg called it an “obsolete precedent,” and asked why Congress should be relied upon to overturn it; Justice Neil Gorsuch said the 1992 concerns the Quill decision was based on “seem a little antiquated today,” and Justice Anthony Kennedy admitted that most of the court’s questions on Tuesday had been based on the assumption that “Quill is incorrect.”
Kennedy arguably invited a test case like South Dakota’s when he in 2015 went out of his way in a concurring opinion upholding Colorado’s imposition of taxes against out-of-state direct marketers, writing: “There is a powerful case to be made that a retailer doing extensive business within a state has a sufficiently ‘substantial nexus’ to justify imposing some minor tax-collection duty, even if that business is done through mail or the Internet.”
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