Yesterday was not only a big tax day for federal income tax filers – it was also a big tax day for the Supreme Court, which heard oral arguments for South Dakota v. Wayfair – a much-followed case by state and local governments across the country which depend on sales tax revenue to fund their public services. The case sought to overturn Quill Corp. v. North Dakota. In Quill, the Supreme Court held that states cannot require retailers with no in-state physical presence to collect sales tax. The high court decided Quill in 1992, before internet sales became a commonplace occurrence.
In Direct Marketing Association v. Brohl, in 2015, Supreme Court Justice Kennedy stated that the “legal system should find an appropriate case for this court to reexamine Quill.” Within a year, a number of state legislatures passed legislation in direct violation of Quill, requiring sales tax collection from internet sales platforms in some form or fashion.
The Maryland General Assembly considered similar legislation as recently as 2017 via the Main Street Fairness Act. This session, the Senate passed SB1025, Department of Legislative Services – Study – Sales and Use Tax Collection by Out-of-State Vendors, which would have required the Department of Legislative Services (DLS) to retain an independent consultant to study sales and use tax collections by out-of-state vendors. The bill never made it out of the Rules Committee in the House.
According to the State & Local Legal Center, South Dakota’s new law was the first ready for Supreme Court review.
Some thought that the case was a slam dunk for state and local governments which depend on sales tax. Unfortunately, yesterday’s line of questioning from the justices proved otherwise.
South Dakota Attorney General Marty Jackley, backed by the attorneys general from 42 other states, argued the case. According to SCOTUSblog, he was quickly peppered with questions.
Justice Sonia Sotomayor:
I’m concerned about the many unanswered questions that overturning precedents will create a massive amount of lawsuits about… How much contact is enough to justify placing this obligation on an out-of-town seller?…. What happens when the tax program breaks down, as it already has for the states who are using it, and merchants can’t keep track of who they’ve sold to?
Chief Justice John Roberts:
The suggestion in some of the briefs is that this is a problem that has peaked in the sense that the bigger e-commerce companies find themselves with physical presence in all 50 states. So they’re already covered. And the work-arounds that some of the states have employed are also bringing more [sellers] in. And if it is, in fact, a problem that is diminishing rather than expanding, why doesn’t that suggest that there [is] greater significance to the arguments that we should leave Quill in place?
Justice Elena Kagan:
From this court’s perspective, the choice is just binary. You either have the Quill rule or you don’t. But Congress is capable of crafting compromises and trying to figure out how to balance the wide range of interests involved here.
Justice Samuel Alito:
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… There are incentives on both sides. But if Quill is overruled, what incentives do the states have to ask for any kind of congressional legislation?
Justice Ruth Bader Ginsburg came across more friendly to the tax collectors:
How about going back to the very basic issue? The assertion is that asking an out-of-state seller to collect tax on goods shipped in-state discriminates against interstate commerce. But, as I see it, why isn’t it, far from discriminating, equalizing sellers. That is, anyone who wants to sell in-state, whether an in-state shop, an out-of-state shop, everybody is treated to the same tax collection obligation. All who exploit an in-state market are subject to the in-state tax. Why isn’t that equalizing rather than discriminating?
Justice Stephen Breyer showed no cards:
When I read your briefs, I thought absolutely right. And then I read through the other briefs, and I thought absolutely right. And you cannot both be absolutely right.
Governing highlights other concerns expressed from the Justices:
They also raised concerns about whether states other than South Dakota would try to retroactively charge online retailers for the sales tax they didn’t impose in the past. Jackley said that 38 other states (of the 45 with sales taxes) have already asserted that they wouldn’t apply the taxes retroactively.
And several justices wondered whether Congress would be better equipped to deal with the issue, rather than the high court, because the federal lawmakers could better craft a nationwide scheme that would address many of the judges’ lingering concerns.
A decision is expected by late June 2018.
