On April 17, 2018, the U.S. Supreme Court heard oral arguments in South Dakota v. Wayfair,¹ a case that may determine the future of the Quill² physical presence nexus requirement for sales and use tax collection purposes. The case involves South Dakota SB 106, which was enacted in 2016 and imposes an economic nexus standard on remote sellers that lack an in-state physical presence for collection of South Dakota sales and use taxes on sales to in-state customers. The state has conceded that the law is unconstitutional under current Commerce Clause jurisprudence, but asserts that the Quill standard has become unworkable in light of advances in technology and the growth of Internet commerce.

The arguments

Before the arguments in Wayfair, consensus within the state tax community was that the Court granted certiorari for the sole purpose of overturning Quill. Following the arguments, this sentiment has changed, and it now seems that overturning Quill is not a foregone conclusion.

The Court's questioning focused on the consequences of overturning Quill, including retroactive application, the cost of compliance with states' sales and use tax collecting and remittance requirements, the minimum standard for establishing nexus, and whether Congress is better equipped to deal with this issue.

After asserting that the states are "losing massive sales tax revenues" and that local small businesses "are being harmed because of the unlevel playing field created by Quill," South Dakota Attorney General Marty Jackley came under intense questioning regarding whether the problem was the Quill standard or whether it was the fact that the states lacked an effective mechanism by which to collect sales and use taxes. The justices also expressed concern that if they were to abrogate the Quill standard, the states would have a free hand to apply a collection obligation retroactively against remote sellers and whether the removal of Quill would create bigger issues and ultimately increase costs for small businesses.

In response to Justice Alito's question of which of the following is the preferred option — (A) eliminate Quill and let states do whatever they want in imposing a retroactive liability and setting a minimum sales threshold for creating nexus; or (B) a congressional law dealing with these issues, Mr. Jackley chose the first option, noting the lack of congressional action over the last 26 years. Justice Kagan, and later in the argument, Chief Justice Roberts, made the point that this is an issue Congress is aware of and perhaps Congress has intentionally chosen not to act. Justice Breyer further noted that the Court is "more willing to overturn a constitutional case … because Congress can't act. But, here, they can act."

Speaking in support of the state, United States Solicitor General Malcolm Stewart noted that Congress ultimately can impose a solution, and that, if states were given greater latitude to experiment with different taxing schemes, Congress would have more tax models from which to choose and could pick aspects of the various laws it liked. Stewart further pointed out that the Quill decision did not deal with the Internet. Stewart noted that "the Court used the term 'physical presence requirement,' … as shorthand for [the] principle [that, if the out-of-state retailer's only contact with the taxing state was delivery of goods and catalogs by mail or common carrier, that was insufficient], but the Court was not saying anything one way or the other about the role of a pervasive Internet presence in establishing sufficient contacts with the state to allow for the collection duty." Later in his argument, Stewart referred back to this point, and suggested that as an alternative to overturning Quill, the Court could clarify it.

Chief Justice Roberts questioned Stewart as to whether there is a constitutional minimum that would cause a small business to have a greater burden than large on-line retailers, to which Stewart replied that, based on dormant Commerce Clause jurisprudence, there is no constitutional minimum. Justices Ginsberg and Kagan questioned whether Congress is better equipped to deal with this issue and establish a minimum, with Justice Kagan noting that "Congress is capable of crafting compromises and trying to figure out how to balance the wide range of interests involved here." Justice Breyer expressed concern that entry barriers to the internet marketplace would rise too high, and wondered if there was a way of "putting minimums in that would, in fact, preserve the possibility of competition … ."

The Court next questioned George Isaacson, who represented Wayfair and others. The Court's questioning, in particular Justice Breyer, focused on the conflicting numbers before the Court regarding compliance costs and lost revenues, among other figures. Justice Breyer also questioned how to determine which side is correct when both positions are logical. Justice Ginsburg wanted to know why requiring an out-of-state seller to collect tax on goods shipped into a state isn't equalizing rather than discriminating against interstate commerce, while Justice Gorsuch wanted to know why the Court should favor "a particular business model that relies not on brick and mortar but on mail order?" Before Isaacson could fully respond to this question, Justice Breyer wanted to know how much it cost to comply. What would it cost a hypothetical mandolin seller who sells on the Internet to sell into all 50 states? What is the mandolin seller's cost to enter into the market? How much does it cost a large online retailer to comply?

Justice Gorsuch asked Isaacson whether complying with the notice and reporting requirements adopted by Colorado are more burdensome than collecting and remitting the tax, and Justice Sotomayor asked whether there was "anything [the Court] can do to give Congress a signal that it should act more affirmatively in this area?" While Isaacson didn't want to "advise this Court on … how it should relay to Congress," he suggested that "all the players involved in this issue are in favor of federal legislation." This led Justice Kennedy to question whether the assumption in asking Congress to act is that Quill was incorrectly decided, and Justice Ginsburg to ask whether the Court should "take responsibility to keep our case law in tune with the current commercial arrangements?"

On rebuttal Attorney General Jackley, in response to a question posed to Mr. Isaacson, said that he didn't believe the Court had to send a signal to Congress, "but if they're looking for a signal, that signal is to overrule Quill."

Implications

Most observers had expected that the Court would move quickly to overturn the 26 year-old Quill standard, given that it agreed to hear the case with a limited record and no real controversy at issue. However, in light of the intense questioning presented to both parties, and the apparent concern expressed by members of the Court that they can only make the "binary" choice of either keeping or eliminating the Quill standard, the possibility that the Court might leave the outcome to Congress, which "has a broader range of options available to it than does the Court and an ability to devise more nuanced solutions," appears now to be a strong possibility.

Regardless of the outcome, multistate taxpayers can expect increased compliance burdens in the coming months; either as a result of the physical presence requirement being eliminated or the states crafting legislation that chips away at that standard (e.g., by adopting "cookie nexus" laws³ or otherwise expanding existing affiliate nexus principles). A decision in Wayfair is expected sometime before the end of June.

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ENDNOTES

¹ Dkt. No. 17-494 cert. granted January 12, 2018.

² 504 U.S. 298 (1992).

³ Interests in or use of in-state software (e.g., "apps") and ancillary data (e.g., "cookies") distributed to or stored on computers or other physical communications devices of vendor's in-state customers constitutes a physical presence or otherwise expanding existing affiliate nexus principles.