United States: A Court Divided: Deciding The SALT Case Of The Millennium

Long-Awaited Decision About to Become...Indecision?

For state and local governments and brick-and-mortar retailers alike, it's been a long time coming. On April 17, 2018, they finally had their day in court. Lawyers involved in the case of South Dakota v. Wayfair1 presented their oral arguments in front of the U.S. Supreme Court and, in the process, re-examined the 1992 decision of Quill v. North Dakota2, in which the Supreme Court ruled that states could not force mail order retailers that lack a physical presence in the state to collect sales tax from their customers. Somewhat unwittingly, the Quill decision provides a massive tax shelter for internet retailers as well, since they also lack physical presence. Many feel the time has come for Quill to be overturned to accommodate retail in the 21st century.

A bit surprisingly—even though more than 40 states, the Trump administration and three of the Court's Justices have criticized the 1992 decision—it remained unclear after oral arguments whether a majority of the court is ready to reverse that decision.

Before arguments were presented, South Dakota was sure it could count on three votes in favor of overturning Quill. In March 2015, Justice Anthony Kennedy wrote a concurring opinion stating that the "legal system should find an appropriate case for this Court to reexamine Quill." While on the 10th U.S. Circuit Court of Appeals, then-Judge Neal Gorsuch wrote an opinion strongly implying that, given the opportunity, the Supreme Court should overrule Quill. Finally, while Justice Clarence Thomas voted in favor of North Dakota in Quill, he has since rejected the concept of the dormant Commerce Clause3 on which the Quill decision currently rests.

Following oral arguments, however, it's not guaranteed that there will be a solid five-justice majority favoring South Dakota. In fact, it appeared during oral testimony that some justices did not believe that the 1992 Supreme Court decision should be overturned. Several hinted that Congress may be best equipped to deal with it, if anything needs to be done at all. They seemed concerned with the burdens on small businesses and the appropriate minimum threshold for collection, as well as the consequences for potential retroactivity if Quill is repealed.

Because the Quill ruling was made well before today's seemingly limitless rise of e-commerce, the loophole it opened for online retailers created a massive loss of sales tax revenue for states. A General Accounting Office report estimated the loss of state and local tax to be as high as $13 billion in 2017.4 In an effort to remedy this loophole, South Dakota passed a law in 2016 requiring retailers with more than $100,000 in sales or more than 200 sales in the state per year to remit tax on those sales. South Dakota sued three large online retailers—Wayfair, Overstock and Newegg—for not complying with its new law. When the state filed suit, the Supreme Court of the State of South Dakota found that the state cannot force remote retailers to collect and remit sales tax if they do not have nexus in South Dakota – that is, if they do not have a physical presence in the state.

Justice Samuel Alito described the South Dakota law as a "test case" that was "devised to present the most reasonable incarnation of this scheme." To catch up to how business is done in the new millennium, South Dakota is asking the U.S. Supreme Court to overrule Quill and allow states the ability to assert nexus for sales and use tax purposes without requiring the sellers to have a physical presence in the state.

Congress vs. The States: Who Best to Implement Change?

Certainly, one of the central questions in this case would be who really is best-equipped to update and uphold the laws of online tax collection to suit the modern era of booming e-commerce? Is it Congress? Or should the states be allowed to create their own tax schemes?

The opposing attorneys presented this conflict in stark contrast. South Dakota's attorney general argued that the Quill decision did not make sense in the digital era, and that the burden for out-of-state retailers—calculating and collecting taxes for thousands of state and local jurisdictions— had been solved by modern software. But, that assertion was heartily disputed by Wayfair's lawyer, who said a ruling against his client would impose burdens on small online merchants. He felt a national solution should come from Congress rather than the Supreme Court.

Justice Sonia Sotomayor seemed to feel that Quill was not the real issue, but rather that the states have not yet figured out a way to collect the tax. "Isn't the problem not Quill but the fact that you don't have a mechanism to collect from consumers?" she asked. "So find a way to collect from them." Sotomayor was concerned that overturning Quill will cause more lawsuits and the potential for retroactive application, and asserted that several states have already started retroactive collection. South Dakota's attorney general quickly reminded her that the states do not want to change the rules retroactively and 38 states have laws that prevent retroactivity.

Justice Elena Kagan expressed concern that the Court may not want to act if Congress does in fact have the issue on its radar. "When Congress has not addressed an issue for 25-plus years," she said, "it gives us reason to pause...This 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, and that seems to make your bar higher to surmount."

Congress has made some attempts to promote simplification and fairness in the collection and administration of sales and use taxes. Since 2005, the following legislation has been proposed:

  • Mainstreet Fairness Acts (MSFA)
  • Marketplace Equity Act (MEA)
  • Marketplace Fairness Act (MFA)
  • Remote Transactions Parity Act (RTPA)
  • Online Simplification Act
  • No Regulation Without Representation

The nexus-creating activity of the proposed bills has varied throughout the years. Yet, what has been consistent is Congress' failure to enact legislation regarding this matter. If Congress enacted legislation, businesses would likely have the certainty of uniformity. Congress would also be able to protect taxpayers from application of the nexus changes retroactively. In contrast, if Quill is overturned, or the Court eliminates the physical presence standard and Congress takes no action, businesses may be forced to comply with each new state law.

The Effects on Small-To-Mid-Size Businesses

Some Justices complained that they lacked fundamental information about how hard it is to collect the taxes and how much money is at stake, particularly for small and mid-size businesses. Justice Stephen G. Breyer seemed to think that neither side was of much help in shedding light on how to effectively determine this, though conventional wisdom says cost for internet businesses to comply with what is said to be 12,000 state and local jurisdictions varied from $12 to $250,000. During the testimony, Justice Sotomayor also expressed concern that overturning Quill would result in burdensome costs for small businesses, stressing that Main Street is at a disadvantage not by Quill, but "by the fact that there are massive discount sellers, not just on the Internet, but even in stores now."

Between multiple Justices, several other concerns for small businesses were raised, including:

  • Sales tax collection software implementation might be too costly for small businesses (noting that one of the briefs cited a $250,000 price tag to implement sales tax software).
  • Costs for audits, integrating the program with existing programs, maintaining it, the difficulties and chaos in the interim period, and issues when the software does not function correctly and merchants are not able to keep track of the buyers.
  • Establishing a Constitutional minimum with regards to out-of-state small businesses being protected from the obligation and burdens of sales tax collection.
  • Establishing how much contact or how many sales are enough to create an obligation of an out-of-state seller.
  • The bigger e-commerce companies now have a physical presence in all states and are collecting sales tax in all states that impose a sales tax.

Something Has to Be Done...Doesn't It?

Is there any indication at all as to which way the court is leaning? Well, judging by the Justices' behavior during oral arguments, the short answer is...NO. Their reactions, much like the thousands of tax jurisdictions across the country, were all over the map. Justices Kennedy and Gorsuch asked Wayfair's attorney different lines of questions indicating they remain anti-Quill. Justice Thomas remained silent. The most vocal champion of overturning Quill was Justice Ruth Bader Ginsburg, saying the court needs to take responsibility for overturning precedent it created, which is no longer appropriate in the current economy, instead of relying on Congress to act.

Justice Breyer may have been the most forthright Justice of them all, saying he read both sides' briefs and concluded both positions were "absolutely right." He looked to the attorneys arguing for both sides to help sort out issues including exactly how much money is on the table, whether it really is easy and inexpensive to collect sales tax and whether tax collection should be retroactive.

Whether they were holding their cards very close to their robes, or if they are in fact splintered in their opinions about the case, one thing is for sure—there must be a resolution soon. If they want to keep Quill intact, modify it or overturn it, or if they want to place the burden upon Congress to craft a solution, there must be a reasonable solution made before this matter is even further complicated with patchworked approaches. Justice Alito echoed this fear, suggesting that if Quill was overturned, states would "grab everything they could" rather than exempt small businesses from having to collect.

The Supreme Court is planning to decide the case by the end of June 2018.

How to Prepare for The Decision

While the Supreme Court's decision is still unknown and it is unclear whether Congress will act, it would be prudent to consider the various alternatives and how each outcome would impact your business. Based on aggressive behavior exhibited by many states, businesses may be at risk of being assessed tax where they have not already been filing. As we wait to see if the physical presence requirement will be re-defined by the U.S. Supreme Court, here are some key considerations that businesses should carefully evaluate:

  • Navigating the new nexus footprint;
  • Preparing for potential surge in registration and sales and use tax reporting responsibilities;
  • Flexibility in monitoring taxability of goods and services for additional jurisdictions based on new physical presence standard;
  • Adaptability with revenue sourcing, invoicing and appropriate line item billing to support all applicable jurisdictions;
  • Keeping up with ever-changing state and local sales and use tax rates.
  • Complying with sales and use tax filing responsibilities for a potentially large population of jurisdictions; and
  • Record retention requirements associated with online activities to ensure you can appropriately support transaction detail during an audit and for other reporting purposes.


1. South Dakota v. Wayfair, Inc., No. 17-494

2. Quill Corp. v. North Dakota, 504 U.S. 298 (1992)

3. Commerce Clause: Authorizes Congress to "regulate commerce with foreign nations, and among the several States." The Supreme Court has ruled that the Commerce Clause prohibits states from enacting laws that might unduly burden or inhibit the free flow of commerce between the states. In Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), the Supreme Court ruled that the taxpayer must have "substantial nexus" with the taxing state in order for the state to impose its tax on the taxpayer.

4. GAO-18-114, SALES TAXES: States Could Gain Revenue from Expanded Authority, but Businesses Are Likely to Experience Compliance Costs

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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