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There's a Huge Tax Case Pending in the Supreme Court

There’s a Huge State Tax Case Pending in the Supreme Court: South Dakota v. Wayfair, Inc.  
Will technology change the world of state taxation?

By Warwick Carter
Published on LinkedIn, March 16, 2018

A month from now, on April 17, 2018 (Tax Day) the Supreme Court will hear oral arguments in the case of South Dakota v. Wayfair, Inc. At issue is whether Wayfair, Inc., and other internet retailers that have no physical presence in South Dakota, can be required, under state law, to collect South Dakota sales (or use) taxes on purchases by residents of South Dakota. The case will force the Supreme Court to review its 1992 decision in Quill Corp. v. North Dakota, in which the Court held that, under the “dormant” Commerce Clause of the Constitution, a state may not require out-of-state retailers to collect use taxes on items sold to residents of that state unless the seller has at least some physical presence in the state providing sufficient constitutional “nexus” for taxation.  

Wayfair will also force the Court to grapple with the reality of technological change since 1992 that has fueled the internet sales revolution, as well as the much improved ability of retailers to collect, track and remit sales and use taxes.  Does technological advancement change the game legally speaking? 

In Quill, the Court was aware of how far mail-order retailing had come over the previous 25 years when it had decided Bellas Hess, the case in which it proclaimed the physical presence test under the dormant Commerce Clause for out-of-state mail-order retailers. There was also a subsequent case in 1977, Complete Auto Transit, Inc. v. Brady, which laid down a four-pronged test for constitutional taxation under the Commerce Clause, which includes a substantial nexus requirement. In Quill, the Court indicated that technological advancement did not change the constitutional analysis. It’s worth noting that Quill was practically a unanimous decision with only one justice dissenting in part (Byron White). 

The Supreme Court is not oblivious to technological developments and seismic technological developments can be a game-changer when reaching appellate decisions. However, even though computer processing speeds are vastly faster now and there are more interstate transactions than ever before, the Court should not bend over backwards to solve the states’ revenue collection problem by changing the standard that people have come to rely upon as valid law. There is a more straight-forward and appropriate constitutional solution, namely Congressional legislation.   Jeff Bezos founded Amazon.com partly on the principle that Quill was good law and that his company wouldn’t have to collect sales tax on the millions of sales it makes each year. Of course, Amazon has grown tremendously and upended the retail economy. Today, Amazon does collect some sales tax but not on all transactions. And, our hearts shouldn't bleed for him.

States are right to be concerned about the effect of the Court’s decisions in this area, which is why they have been passing laws in droves to impose and collect sales and use taxes on internet transactions. However, an important part of the Quill decision is the clear statement that Congress has plenary authority under the Constitution to regulate interstate commerce; it can (and ought to) change the law in this area. Nevertheless, Congress has done little to nothing to solve the problem despite the efforts of some senators and congressmen and many state legislatures.  One can only think that it’s purposeful neglect by Congress (or maybe good lobbying by industry).

In Quill, the late Justice Antonin Scalia wrote a concurring opinion that was joined by Justices Kennedy and Thomas. He said:

“I also agree that the Commerce Clause holding of Bellas Hess should not be overruled. Unlike the Court, however, I would not revisit the merits of that holding, but would adhere to it on the basis of stare decisis. American Trucking Assns., Inc. v. Smith ***. Congress has the final say over regulation of interstate commerce, and it can change the rule of Bellas Hess by simply saying so. We have long recognized that the doctrine of stare decisis has "special force" where "Congress remains free to alter what we have done." *** Moreover, the demands of the doctrine are "at their acme . . . where reliance interests are involved," *** As the Court notes, "the Bellas Hess rule has engendered substantial reliance and has become part of the basic framework of a sizeable industry."

In seeking to predict what the Court might do next, Commentators have pointed to the 2015 comments by Justice Kennedy calling for an overhaul of the Quill doctrine in his concurring opinion in Direct Marketing Assoc. v. Brohl. In that concurrence, Justice Kennedy said:

“In Quill, the Court should have taken the opportunity to reevaluate Bellas Hess not only in light of Complete Auto but also in view of the dramatic technological and social changes that had taken place in our increasingly interconnected economy. 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. After all, “interstate commerce may be required to pay its fair share of state taxes.” *** This argument has grown stronger, and the cause more urgent, with time. When the Court decided Quill, mail-order sales in the United States totaled $180 billion. *** But in 1992, the Internet was in its infancy. By 2008, e-commerce sales alone totaled $3.16 trillion per year in the United States.”

Others observe that Justice Thomas too is less than thrilled with Quill and that the newest justice, Neil Gorsuch, has also expressed doubts about its relevancy today.   However, despite the fact that Quill has many detractors and is out of date given technological advancements, the governmental body that can, and should, modernize the law is Congress, not the Supreme Court.  If the Supreme Court overrules Quill, then we’ll have to deal with the ripple effects across industries and various types of state taxes. The amicus brief for Americans for Tax Reform observes that if the physical presence test in Quill is abandoned, and e-commerce retailers must collect and remit state sales taxes to thousands of jurisdictions instead of just one, the increased costs of implementing the new structure will be passed on to consumers. This argument has merit. Without having all the facts and policy concerns in front of it, and lacking legislative powers, the Supreme Court should not step over the line to rectify what appears to be an obvious lack of policymaking by another branch of government unless the Constitution compels it to do so. Here, there is no such compulsion.  Further, the Court cannot order Congress to act and it should not wreak havoc on industry unless the Constitution compels the result. States have been impacted not so much by the physical presence requirement of the dormant Commerce Clause, but the disruptive effects of the internet (which didn't really exist prior to 1992) as have so many other businesses and industries.

The Quill decision has been relied upon by state courts (perhaps erroneously) in other tax areas, such as the state income taxation of trusts (see District of Columbia v. Chase Manhattan Bank (D.C. 1997) and Chase Manhattan Bank v. Gavin, (Conn. 1999), cert. denied (1999). A new Supreme Court standard for state taxation will likely cause unintended disruption in areas outside of sales and use taxation.  

The views expressed above are clearly in the minority. A quick Google search and a review of the many amicus briefs filed in the Wayfair case indicate a clear gravitational pull away from Quill.   I may be wrong and the Court may well overrule Quill. However, if it does, I expect that the decision will not have a great legacy and that Congress will finally step in to fix the situation since it will be big business, instead of the states, on the losing end of the Court’s decision.

For more information, See SCOTUSBLOG.

Listen to Nina Totenberg's report on the oral argument on NPR.

Warwick Carter