Supreme Court Hears Oral Argument in Sales Tax Collection Case

Oral arguments took place on April 18 before the United States Supreme Court in the case of South Dakota v. Wayfair.  The case is a challenge to a South Dakota statute the requires the collection of South Dakota’s sales tax by any seller that sells more than $100,000 of product into South Dakota during a calendar year or who has 200 or more separate transactions within the state during that year. 

For those who wish to listen to the hour long session, you can find the audio here.

This statute pushes for pure economic nexus—no other sort of presence inside South Dakota (even “cookie nexus” like that being pursued by states like Massachusetts) is required to trigger collection. Such a position is directly contrary to the physical presence requirement outlined by the U.S. Supreme Court in the case of Quill Corp. v. United States, 504 U.S. 298 (1992) and, based on this fact, the statute had been struck down by South Dakota courts, including the South Dakota Supreme Court

But that was by design—this was a statute meant to give the Supreme Court a chance to reverse the Quill holding.  The State of South Dakota cleared the first hurdle necessary to get the decision overturned when the U.S. Supreme Court agreed to hear the appeal in January of 2018.

While “oral arguments” may sound like a staid set of prepared speeches, the reality is that the parties rarely get more than slightly into their remarks before being bombarded by questions from the individual justices—and that was true in this case.  All the justices except Justice Thomas (who almost never asks questions during oral arguments) posed questions during the one-hour session.

Much is written about the questions asked by the various justices, with commentators attempting to gauge how the justices will rule based on the questions.  But it should be noted that justices may pose questions for various reasons, including asking a question to test whether a position contrary to the one they initially believe is correct may nevertheless be a more appropriate one.  So, attempting to predict outcomes based on the oral arguments is an endeavor fraught with peril.

But the arguments are useful in looking at the issues the Justices are aware of, in this case being especially concerned about the potential ramifications of a decision either to sustain or overturn Quill’s physical presence test.

Reading the transcript gave this author the feeling that the Justices are considering the key practical issues involved with the matter. 

Justice Sotomayor, the first Justice to speak, asked questions expressing concerns about the unleashing of a massive amount of litigation if the Court were to simply remove the Quill physical presence standard.  She also raised the question about whether a state could retroactively apply any ruling to collect back taxes and impose the tax on everyone—and, again, the parties arguing for South Dakota indicated that it would be allowed but that the states would exercise restraint.  However, the Justices in general did not appear comfortable with the view that all states and localities would exercise such restraint.

As Justice Alito observed later in the session:

JUSTICE ALITO: But South Dakota law is obviously a test case. You know, it was -­it was devised to present the most reasonable incarnation of this scheme. But do you have any doubt that states that are tottering on the edge of insolvency and municipalities which may be in even worse position have a strong incentive to grab everything they possibly can?

One interesting and important issue that came up and was asked both of South Dakota Attorney General Marty J. Jacke and U.S. Solicitor General Malcolm L. Stewart (who argued in favor of South Dakota’s position).  If Quill is overturned, what number of sales or what amount of sales would grant a state the right to require tax collection.  Both responded that a single sale, no matter what the amount, would be sufficient under the U.S. Constitution to allow a state to require tax collection.

Solicitor General Stewart, in response to a question from Chief Justice Roberts on the matter, stated “if you have an out-of-state retailer who is deliberately selling a particular physical good within the state, shipping the good into the state for delivery to the customer and transfer of title, that that is a sufficient basis for subjecting that retailer to the tax collection obligation…”  Later the arguments South Dakota Attorney General Jacke agreed with that position.

In response to this single sale view, Justice Sotomayor specifically asked, “what are we going to do with the costs you’re going to put on small businesses?”  The Attorney General argued that, in fact, the Quill standard imposes costs on small brick and mortar businesses by forcing local businesses to collect a tax that out of state sellers are not required to collect.

When Attorney General pointed out there were software solutions to the issued that started at $12 for a small volume of online sales a small business might make, the Justice responded:

JUSTICE SOTOMAYOR: That doesn’t include auditing. It doesn’t include integrating the program with the existing sales program of the company. It doesn’t account for the maintenance of the program.

There’s lots of costs that are inherent in a process of this type.

Later Justice Breyer posed a similar concern about an abandonment of Quill imposing barriers to entry to small businesses that could leave the e-commerce realm to only the largest vendors such as

The Attorney General responded to Justice Sotomayor that the physical presence test can cause the same problem, as even a minor amount of physical presence by a small business in a state can require the business to comply with all the local tax laws, including the collection of sales taxes.

Many of the Justices wondered about whether this whole issue wasn’t better handled by Congress.  The appellants pointed out that Congress has had years to deal with this and they simply hadn’t done so—thus, the Court should take on the matter.  In fact, the appellants argued, the situation created by overturning Quill would give Congress a very specific incentive to act.

Justice Alito wasn’t as sure this was true, since he wondered what incentive the states would have to seek Congressional action once they were given the ability to impose the obligation on a seller of even a single item.  On the other side, Justice Ginsburg’s observations and questions seemed to indicate she believed Congress could and would take on these issues.

As well, Justice Kagan asked whether the lack of response by Congress shouldn’t be taken not as a failure to address the issue, but rather that Congress had addressed the issue and indicated they preferred to keep things as they are.  As the Justice noted “[t]his 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.”

Justice Breyer was also skeptical about the Court stepping in an overturning Quill rather than leaving the matter to Congress.  The Justice stated:

JUSTICE BREYER: No, no, but the word constitutional is not magic. The reason that we say we are more willing to overturn a constitutional case is because Congress can’t act.

But, here, they can act. And, therefore, there is no reason for treating it specially.

Ultimately the South Dakota Attorney General argued that Congress won’t act because they, essentially, don’t want to take the blame for allowing states to get payment of this tax.

MR. JACKLEY: Congress doesn't have an incentive in this instance to take action in something that could be perceived as a tax when yet they don't get the opportunity to use the revenue.

Justice Breyer in many questions expressed a level of frustration with the lack of a factual basis from which the Court could decide in this case.  As the Justice stated to the South Dakota Attorney General in a statement that brought laughter to the courtroom (he also drew laughter yet again later with a quip about Sears Roebuck):

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

The Justice noted that each brief cited wildly divergent numbers for the same issues—thus, the Justice’s frustration with the lack of information on which the Court could decide.

During the presentation by George Isaacson, representing the vendors in this case, the challenges to the vendor’s position to keep Quill in place arose. 

Justice Ginsburg, likely looking to bring Justice Gorsuch into the conversation, wondered if the vendors weren’t asking for an unfair advantage over in-state sellers, the opposite of the type of concern that generally arises when looking at challenges to state laws in interstate commerce cases, a position outlined by then-Judge Gorsuch in his concurrence in the Tenth Circuit’s upholding of Colorado’s tattletale statute. (See Colorado Law Requiring Out of State Sellers to Report on Colorado Customers Who May Owe Use Tax Upheld by Tenth Circuit)

Justice Gorsuch did jump in on this issue after Mr. Isaacson attempted to explain the vendor’s position:

I don't think you've quite addressed Justice Ginsburg's question, though, which is brick-and-mortar retailers, if they choose to operate in any given jurisdiction, have to comply with that jurisdiction. There are a lot of retailers that have to comply with lots of different jurisdictions’ rules.

Why should we favor, this Court favor, a particular business model that relies not on brick and mortar but on mail order?

Justice Gorsuch, again not surprisingly, decided to press Mr. Isaacson on the obvious alternative—the Colorado tattletale rule that was upheld by the panel that Justice Gorsuch was a member of back in his Tenth Circuit days.  Specifically, he asked Mr. Isaacson whether Colorado’s “turn in your customers” regime might be more burdensome than simply collecting the tax.

Mr. Issacson responded that Colorado’s regime was much less burdensome, arguing that the Colorado law “simply requires a single annual spreadsheet reporting of all the purchases that were made by Colorado residents.”

In response to a comment from Justice Ginsburg that cited the South Dakota argument that software could be developed that would allow for collection at a reasonable cost, Mr. Isaacson disagreed, stating:

MR. ISAACSON: The notion of software being a silver bullet, I -- I think, is – is a -- is a real misapprehension. The actual looking up of the rate for the 12,000 different tax jurisdictions hardly scratches the surface.

Retailers need to map their products against that software, which is rife with errors because common products are defined differently in different states. And it's not merely the 45 states plus the District of Columbia that have sales tax, but there are over 500 home rule jurisdictions that have their own tax bases and definitions.

The record retention that's necessary for exempt buyers, exempt transactions, exempt uses, is a physical process that needs to be done by the -- by the retailer. The filing of the -- of the reports are different for the various states.

In response to Mr. Isaacson arguing that Quill should stay in place because companies have set up their operations relying on that case, Justice Roberts returned to the fairness issue:

CHIEF JUSTICE ROBERTS: In other words, the benefit comes from them not just from the fact that they don't have to collect, but from the fact that most people aren't paying use taxes.

As was noted at the beginning of this article, reading too much into the questions and responses to attempt to predict the Justices votes.  But certainly, it helps to understand the issues the justices seem to believe must be resolved.

Also of note is the fact that very little time was spent on the details of South Dakota’s law, technically the issue before the Court at this point.  There was a lot of concerns raised about the potential chaos that might result if the Court failed to provide a clear standard for when the states could step in. 

That could be important, since one obvious way out of the situation if the Court believes Quill is an inappropriate standard but doesn’t know a new one to apply would be to rule that physical presence isn’t absolutely necessary but that the issue of whether the burdens on outside seller’s is too great compared to the state’s interests in collecting the tax would need to be decided based on the specific facts of the law—and then send the case back to a trial court for development of the facts in the South Dakota case.

Ultimately Justice Breyer effectively summarized (twice) the issue the Court will struggle to answer:  “What’s the standard? What’s the standard?”