On April 17, 2018, the Supreme Court of the United States heard oral arguments in South Dakota v. Wayfair, et al. South Dakota is challenging, and attempting to have overturned, the physical presence nexus standard for the collection of sales and use taxes that was re-affirmed 26 years ago in Quill Corp. v. North Dakota. While many believed the Court would never have accepted South Dakota v. Wayfair if it didn’t intend to overrule Quill, the questions from the highly engaged Justices could suggest a different outcome (one that will be anxiously anticipated and possibly issued this summer).
South Dakota enacted its economic presence nexus statute for sales and use tax collection on March 22, 2016. The effective date of the legislation is stayed, pending the resolution of the Wayfair case. Under the statute, a remote seller is required to collect and remit sales tax if: (1) the seller’s South Dakota sales exceed $100,000; or (2) the seller has more than 200 separate sales transactions into South Dakota.
In addition to the economic nexus thresholds, S.B. 106 provided for an expedited appeal process. Shortly after enactment, South Dakota filed a declaratory judgment action against remote sellers in South Dakota. The trial court quickly disposed of the case by granting summary judgment in favor of the sellers, citing Quill as judicial precedent. The case was then appealed to the South Dakota Supreme Court, which also ruled in favor of the sellers, again noting that Quill remains controlling precedent.
On January 12, 2018, the Court agreed to hear the case by granting South Dakota’s petition for a writ of certioriari.
Highlights of the Oral Argument
While one must exercise caution not to misconstrue the questions raised by the Justices in an oral argument before the Supreme Court, the following highlights could presage the Court’s decision in South Dakota v. Wayfair, which is expected before the Court’s October 2017 term concludes.
1. The Justices were focused on whether congressional action is still the best solution.
While upholding the physical presence nexus standard under the Commerce Clause in Quill, at least for sales and use taxes, the Court sent a message in 1992 that Congress could legislate a different standard. While the South Dakota Attorney General argued the inability of Congress to enact any legislation on the issue in the past 26 years demonstrates that the Court should overrule Quill, the Justices appeared unpersuaded by the interregnum. For instance, according to Justice Kagan, the issue has remained prominent in Congress and has been on Congress’s “radar screen.” Indeed, a consistent theme throughout oral argument from a number of the Justices (including Chief Justice Roberts and Justices Alito, Breyer, Ginsburg and Kagan) was whether another signal from the Court for congressional action was the better course of action. For example, Justice Alito asked South Dakota’s Attorney General if the Court overruled Quill, then, “what incentives do the states have to ask for any kind of congressional legislation?”
Alternatively, in light of what is apparently a major concern of the Justices (the minimal economic threshold, in the following section), Justices Ginsburg and Kagan also seemed to suggest that the Court could overrule Quill but would signal Congress to legislate that minimal threshold.
2. What is the minimal constitutional economic nexus threshold?
As noted, throughout oral argument, the Justices were concerned whether there is, and if so, what is, the minimal constitutional economic nexus threshold. While the South Dakota statute uses a $100,000 sales threshold or 200 sales transactions threshold, it is disconcerting that both the Attorney General and the United States Solicitor General, in response to questions from the Justices, agreed that the minimal constitutional threshold is “one sale.” A number of the Justices also appeared concerned by these responses. Although perhaps skeptical that “one sale” is the minimal constitutional threshold and concerned with the importance of establishing such a threshold, most of the Justices seemed inclined to kick that problem to Congress.
3. Did the Solicitor General help or hurt South Dakota?
The United States Solicitor General, Malcolm Stewart, also participated in the oral argument. In addition to agreeing with South Dakota’s Attorney General that “one sale” is the minimal constitutional nexus threshold, the Solicitor General may not have been as helpful to South Dakota’s case as some anticipated. When pressed by Chief Justice Roberts, the Solicitor General remarked that a decision overturning Quill should be given retroactive effect. A number of Justices, including Justice Sotomayor, raised concerns about such retroactive effect. It is widely considered that North Dakota’s Attorney General’s concession during the Quill oral arguments, that retroactive application of a decision in favor of the state, was a key reason the Court upheld the physical presence nexus standard 26 years ago.
In addition, the Solicitor General argued that Quill was not an “inadvertent ruling as to Internet presence.” In other words, when the Court upheld the physical presence nexus standard in Quill, according to the Solicitor General, the Court did so only for catalog mail order sellers, not internet sellers. As a result, the Solicitor General believed the Court need only “clarify” Quill, not overrule the decision.
4. Is overruling Quill only an issue for small businesses?
Most of the Justices were concerned about the impact a decision to overrule Quill could have on small businesses. South Dakota’s Attorney General, the Solicitor General and Chief Justice Roberts remarked that most of the large internet retailers are already collecting sales and use taxes. According to the Chief Justice, the lack of sales and use tax collection “in terms of economic impact . . . has peaked” based on the briefs filed in the Wayfair case. For many of the Justices, the Wayfair case, and overturning Quill, appears to be a small business tax collection and compliance costs issue. Justices Sotomayor, Breyer, Ginsburg and Gorsuch pressed the Attorney General and counsel for Wayfair heavily in this regard. The Justices also appeared to express some frustration with the inability to determine an accurate measurement of the costs of compliance, given conflicting information in briefs filed in the case. As raised by counsel for Wayfair, this may be due to South Dakota’s expedited appeal procedures. While the state’s economic nexus legislation was obviously designed to obtain a speedy resolution (or demise) of the physical presence nexus standard, the result is a case before the Supreme Court that has no record established.
- The Justices appeared focused on whether congressional legislation is still the better approach to moving on from the physical presence nexus standard; the retroactive effect of a decision overruling Quill; what is a constitutional minimal economic threshold; and the impact on, including costs of compliance for, small businesses.
- If the Court overturns Quill, it is likely that more states will be encouraged to enact similar sales/use tax economic nexus legislation.
- If the Court upholds Quill, it is likely that states will become even more aggressive in pushing the envelope of physical presence nexus. Affiliate, attributional, “click-through,” software and “cookie” nexus will likely become even greater focus areas for states.
- Depending on the outcome of the Wayfair decision, federal legislation that has been pending in the U.S. Congress for some time could get a boost.