Justices Seem Divided on Collecting Taxes From Out-of-State Sellers

By Mark Walsh — April 17, 2018 3 min read
  • Save to favorites
  • Print


The U.S. Supreme Court appeared divided on Tuesday on whether to overrule a 26-year-old precedent that limits when states, school districts, and other jurisdictions may collect sales tax on out-of-state purchases by their residents.

There are billions of dollars in potential new revenues at stake in South Dakota v. Wayfair Inc. (Case No. 17-494), in which the justices are considering whether to maintain a rule that bars the states from levying tax on out-of-state sales unless the seller has a physical presence in the state, such as a store or warehouse. That rule came from the court’s 1992 decision in Quill Corp. v. North Dakota.

“There are two very significant consequences brought about by Quill,” Marty J. Jackley, the attorney general of South Dakota, told the court during oral arguments. “First, our states are losing massive sales tax revenues that we need for education, health care, and infrastructure. Second, our small businesses on Main Street are being harmed because of the unlevel playing field created by Quill, where out-of-state remote sellers are given a price advantage.”

The state in 2016 enacted a law designed to challenge the Supreme Court precedents that established the physical-presence rule, including Quill. That decision was rooted in an era of mail-order catalogue sales. Since then, Internet retailing has exploded, and states say they are missing out on at least $8 billion and as much as $34 billion annually in sales taxes from remote sellers.

South Dakota is joined by a friend-of-the-court brief signed by 41 other states (45 states and the District of Columbia have sales taxes). Several education groups have joined a similar brief filed on South Dakota’s side by the National Governors Association.

South Dakota, however, ran into immediate concerns from several justices about the impact of overruling the physical-presence rule.

Justice Sonia Sotomayor asked about the possibility that some states would seek millions of dollars in retroactive sales tax from out-of-state sellers. She also expressed concern about the costs of tax-compliance software, which South Dakota and its allies contend make it much easier for sellers to comply with tax obligations from some 12,000 taxing jurisdictions nationwide.

“There are lots of costs inherent” in purchasing such software and keeping it updated, Sotomayor said.

Justice Elena Kagan noted that Congress had not moved to overturn Quill in the 26 years since it was decided. Even though the court’s rulings were constitutional ones under the commerce clause, the court’s jurisprudence in this area would allow lawmakers to come up with an alternative to the physical-presence rule.

“This is a very prominent issue which Congress has been aware of for a very long time and has chosen not to do something about that,” Kagan said, which should give the court pause about disturbing it.

Deputy U.S. Solicitor General Malcolm S. Stewart, arguing in support of South Dakota, said the court in Quill “was not saying anything one way or the other about the role of a pervasive Internet presence in establishing sufficient contacts with the state to allow for the collection duty.”

George S. Isaacson, a Lewiston, Maine, lawyer representing three web retailers who argue for keeping the physical-presence rule, said “small- and mid-size companies will be deterred from entering the market” if the court overrules the requirement from Quill.

Some justices appeared more sympathetic to South Dakota’s position.

Justice Neil M. Gorsuch said the retailers’ concerns “seem a little antiquated today.”

“Why should this court favor a particular business model?” Gorsuch asked Isaacson.

The retailers’ lawyer said that state borders and sovereignty were important.

Justice Anthony M. Kennedy, who voted for the Quill decision but essentially invited the challenge to it in a 2015 concurrence in another tax case, asked few questions, but he did refer to the changes wrought by the “Cyber Age.”

Justice Stephen G. Breyer said he found strong arguments on each side, and to help himself decide which was right, he wondered, “what does it cost for a mandolin seller who sells mandolins on the Internet to sell them in 50 states? How much does it cost him to enter that market?”

And while some of his colleagues bandied about the names of web retailers such as Amazon and Etsy, Breyer wondered about how much it had cost “Sears, Roebuck” to enter the national market.

Breyer seemed to discount the recent struggles of the classic American catalogue and department store retailer.

“You know, that’s an ancient name, but they did all right,” he said.

A decision in the case is expected by late June.

A version of this news article first appeared in The School Law Blog.