Argument analysis: Justices are divided on whether to overrule precedents on sales-tax collection by remote sellers

Anyone who thought that just because one member of the Supreme Court had invited a test case about whether to overrule Quill Corp. v. North Dakota meant that every justice was prepared to do so quickly got a reality check this morning.

In South Dakota v. Wayfair Inc., the court is considering whether to overrule Quill, a 1992 decision that the Constitution’s commerce clause prohibits the states from requiring out-of-state retailers that do not have a physical presence in the state to collect tax on sales to state residents.

South Dakota Attorney General Marty Jackley explained why he believed the court should reconsider the older ruling.

“There are two very significant consequences brought about by Quill,” said Jackley, a Republican who happens to be running for governor this year. “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.”

He quickly ran into a non-stop series of questions from Justice Sonia Sotomayor, who was not slowed by a fall at her home on Monday morning that, according to the court’s public information office, resulted in a broken left shoulder.

“I’m concerned about the many unanswered questions that overturning precedents will create a massive amount of lawsuits about,” she told Jackley.

One concern was about retroactive liability for sellers if the court changes the physical-presence requirement. South Dakota has specifically ruled out retroactivity in the 2016 law it passed that seeks to subject out-of-state sellers to sales tax liability based on an economic presence rather than a physical nexus. But other states could seek such retroactive liability, Sotomayor says.

She had more. “How much contact is enough to justify placing this obligation on an out-of-town seller?” Sotomayor said. And while South Dakota and its allies have pointed to sophisticated software programs that help sellers determine their sales tax obligations from the estimated 12,000 taxing jurisdictions in the United States, Sotomayor asked, “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?”

The high stakes of the case seemed evident throughout the argument, though the justices took note of the fact that there was wide disagreement about the relevant numbers.

South Dakota contends that it is missing out on about $50 million in sales tax revenue under the Quill rule, a significant sum for a state with no income tax. The state also cites in its brief an estimate from researchers that all the states and local jurisdictions with sales taxes are missing out on $34 billion in revenues because of Quill this year.

The three web retailers who are respondents in this case — Wayfair Inc., Overstock.com Inc., and Newegg Inc. — cite a 2017 Government Accountability Office study that is more conservative, offering an estimate of lost revenue between $8 billion and $13 billion for this year.

“You have wildly different estimates of costs, revenues, and what states are losing or not,” Justice Stephen Breyer pointed out to Jackley. He also asked about retroactivity and the standard for determining sales-tax liability.

“When it comes to retroactivity, the states don’t want to address this retroactively, which is why South Dakota, illustrative of that, has indicated we’re prospective only,” Jackley said. “In the briefing, 38 other states have indicated their laws would prevent retroactivity.”

Chief Justice John Roberts asked Jackley whether the nation was perhaps past the stage when many large Internet retailers were not collecting sales taxes, in part to enjoy a price advantage over brick-and-mortar stores.

“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,” Roberts said. “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?”

Jackley replied that e-commerce continues to expand, and the states are expected to miss out on some $100 billion in revenue over the next 10 years.

Deputy U.S. Solicitor General Malcolm Stewart took to the lectern on South Dakota’s side, and he pointed out that whether the court overrules Quill or its 1967 predecessor, National Bellas Hess, Inc. v. Illinois Department of Revenue, leaves them in place, or does something in between, “Congress can act.”

“Congress can impose whatever solution it believes is appropriate,” said Stewart.

In the courtroom on Tuesday were several members of that body, including Sen. Lamar Alexander, Republican of Tennessee; Sen. Mike Enzi, Republican of Wyoming.; and Sen. Heidi Heitkamp, Democrat of North Dakota. Those three, along with Sen. Richard Durbin, Democrat of Illinois, filed an amicus brief on South Dakota’s side that argues that Quill should be overruled but that “Congress is fully prepared to act when needed.”

The chief justice pressed Stewart on whether there is a constitutional minimum by which a small Internet retailer facing the burdens of complying with state sales-tax obligations might have a claim for relief.

Stewart said there is no such minimum under the court’s dormant commerce clause jurisprudence. A retailer shipping even just one good into a state could be subject to the regulatory burdens of that state’s tax requirements. But in an answer to a question from Justice Ruth Bader Ginsburg, Stewart said that Congress could address that issue.

When George Isaacson, the Lewiston, Maine, lawyer representing the retailers, began his argument time, he quickly ran into a concern from Ginsburg.

“How about going back to the very basic issue?” she said. “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?”

Isaacson replied, “Well, the dormant Commerce Clause takes as its principal objective the maintenance of a single national marketplace that is free and accessible to all participants.” He pointed out that at the time of the Bellas Hess decision in 1967, there were some 2,300 taxing jurisdictions, a figure that had jumped to 6,000 at the time of the Quill ruling in 1992, and to today’s estimate of 12,000. “So the concern that the Bellas Hess and Quill courts had was the notion that a free and open market would be encumbered by that degree of complexity,” Isaacson said. “And that complexity has only worsened over time.”

Justice Neil Gorsuch, who as a member of the U.S. Court of Appeals for the 10th Circuit wrote a concurrence that questioned the vitality of Bellas Hess and Quill, pressed Isaacson on why, when brick-and-mortar stores must comply with sales tax obligations, the court should favor “ a particular business model that relies not on brick and mortar but on mail order?”

“I understand in Bellas Hess the court was concerned about a nascent, small mail order industry,” Gorsuch said. “Those concerns seem a little antiquated today.”

Isaacson replied that “Borders count. States exercise their sovereignty based upon borders, territorial limits.  It’s a key part of horizontal federalism in this country. So, if there’s going to be some standard that determines when is a company subject to the tax jurisdiction of a state, using the territorial limits of that state make sense.”

Isaacson said that Congress would be the best branch to address the issues of sales-tax collection for out-of-state sellers, such as by requiring one tax rate per state for all remote sales. “It can require a clearinghouse that can be used for the processing of payments,” he said. “It can require standard uniform definitions of products so that food and sportswear and clothing doesn’t mean one thing in one jurisdiction and another elsewhere.”

When Sotomayor asked Isaacson whether there was anything the court could do to signal to Congress “to act more affirmatively in this area,” Isaacson said, “I would welcome a decision from this court that would indicate that Congress should move forward with consideration and action upon legislation.”

This prompted an observation from the chief justice that lawmakers perhaps have already decided “that this is something they’re going to leave the way it has been for, whatever it is, 25 years.” “I think it would be very strange for us to tell Congress it ought to do something in any particular area,” Roberts said. “Just a thought.”

Kennedy, who had invited the challenge to Quill with his concurrence in 2015’s Direct Marketing Association v. Brohl, asked only a couple of questions, in which he appeared to be restating the arguments of Isaacson or others. He referred to a proposition, whether it was that of the parties or his own, that “this court has made a statement of constitutional law that … has now, especially in light of the cyber age, proven incorrect.”

There were multiple references to the retail denizens of the cyber age. Roberts and other justices cited Amazon several times, even though the web retailing giant is not involved in the case as a party or amicus. Justice Elena Kagan cited Amazon as well as sites such as eBay and Etsy.com that might seek to take over tax-collection duties for their smaller, affiliated sellers.

Justice Stephen Breyer set himself apart by asking what it would 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 Breyer wondered how much it had cost “Sears, Roebuck” to enter the national market. Perhaps sidestepping the recent struggles of the storied catalog and department store retailer, he added, “You know, that’s an ancient name, but they did all right.”

A decision in the case is expected by late June.

[Disclosure: Goldstein & Russell, P.C., whose attorneys contribute to this blog in various capacities, is among the counsel to the petitioner in this case. The author of this post is not affiliated with the firm.]