Supreme Court Debates Online Sales Tax Law’s Modern Application

Justice Anthony Kennedy, who invited review of the matter in 2015, asked if the high court’s 1992 decision set the wrong precedent. Quill v. North Dakota said the Constitution’s commerce clause can prevent states from collecting sales tax from out-of-state retailers. With more than 6,000 sales and use tax jurisdictions, the high court said the tax system is too complicated for a seller to know what to collect. If the original precedent is wrong, Kennedy asked if it would be wrong to expect Congress to fix Quill. Justice Ruth Bader Ginsburg said if Quill is flawed, given advances since 1992, the court regardless might need to correct an “obsolete precedent.”

Wayfair attorney George Isaacson said chaos would ensue if Quill were reversed because it would subject small to medium-sized businesses to thousands of new tax jurisdictions, and that wouldn't end until Congress reaches compromise. Breyer said reports conflict about the burden on companies seeking to comply with a potential Quill reversal. He asked what Amazon pays to comply with collecting taxes in the nearly 50 states it physically occupies. Isaacson couldn't offer figures but said the cost to integrate a tax collection system could run up to $250,000 for a business, though that estimate was disputed during the hearing.

South Dakota Attorney General Marty Jackley (R) contended states could collect massive amounts of vital funding for healthcare, education and infrastructure. Out-of-state sellers also are using tax advantages to take business away from local brick-and-mortar stores, he said. Congress has failed to address the issue for 26 years, he said. On compliance burdens, Jackley said Wayfair collects taxes in some 20 states, suggesting large retailers won't be excessively hindered. He noted South Dakota pays retailers up to $70 per month to reimburse compliance costs for the state’s tax law, which is at the center of the controversy. Kennedy suggested South Dakota’s law was clearly meant to test the 1992 decision.

Justice Elena Kagan asked if this is a “very prominent issue” Congress has chosen not to address, does South Dakota have a higher bar to successfully argue its case. Jackley responded that Supreme Court decisions or even the possibility of a decision can sometimes spur congressional action, citing the recently passed Clarifying Lawful Overseas Use of Data Act (see 1803220057). The high court won't proceed with a related court case because of the new Cloud law (see 1804170040). Congress is unlikely to act before the Wayfair case is potentially decided in June, observers say.

All major retail players favor enacting federal legislation, Isaacson said, as the largest companies already collect taxes in most jurisdictions. Kagan suggested the decision before the Supreme Court is “binary” in potentially striking down Quill, while Congress has much more flexibility to reach a resolution balancing a wide range of interests. Deputy Solicitor General Malcolm Stewart agreed Congress has more flexible options.

Justice Samuel Alito alluded to concern from retailers that overturning Quill removes all incentive for states to remain at the table for negotiating legislation. Isaacson said lack of state involvement would be a major blow for the prospect of congressional action. Breyer noted prominent lawmakers claimed in their briefs that Congress was nearing a solution, including House Judiciary Committee Chairman Bob Goodlatte, R-Va., and Sens. Ted Cruz, R-Texas; Steve Daines, R-Mont.; and Mike Lee, R-Utah.