On Tuesday—Tax Day—the US Supreme Court heard arguments in South Dakota v. Wayfair. The issue in Wayfair is whether, under the dormant Commerce Clause, a state can require an out-of-state retailer to collect use tax on sales that the vendor makes to in-state purchasers—or, as some say, whether Quill Corp. v. North Dakota, 504 U.S. 298 (1992), the case that upheld the physical presence requirement before the obligation to collect can be imposed that was set out in National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967), should be “killed.” South Dakota, encouraged by Justice Kennedy’s comment in Direct Marketing Ass’n v. Brohl, 135 S. Ct. 1124, 1135 (2015) that “[t]he legal system should find an appropriate case for this Court to reexamine Quill,” enacted SB 106 on March 22, 2016 (effective May 1, 2016) as a direct attempt to repudiate Quill. SB 106 provides that remote sellers are deemed to have nexus if in the previous or current calendar year they have (a) $100K or more in gross revenue from the delivery of taxable products or services into South Dakota or (b) 200 or more in-state transactions. The legislation also provided an expedited appeals process, which led to the South Dakota Supreme Court’s rejection of the state’s request for a declaration that the law was valid and its holding that “Quill has not been overruled. Quill remains the controlling precedent on the issue of Commerce Clause limitations on interstate collection of sales and use taxes.”(South Dakota v. Wayfair, 2017 S.D. 56 (9/13/2017).)
Most state tax pundits predicted that the Court’s grant of certiorari was a signal that the Court was poised to jettison Quill. The bench (other than Justice Thomas who, as usual, kept his questions to himself) was hot, peppering counsel with questions, and several Justices signaled their concern that overruling Quill would open a Pandora’s box of problems that Congress is best suited to address. In Quill, the Court explained that it was the Commerce Clause and not the Due Process Clause that prohibited states from imposing an obligation on out-of-state sellers lacking an in-state physical presence and that “Congress is now free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes.” Several Justices also appeared to consider whether repealing Quill would provide the needed motivation for the states and retailers to finally get Congress to act.
Justice Sotomayor noted the host of difficult questions that would ensue if Quill was overruled, including retroactivity, determining the level of contact that would be sufficient to impose the use tax collection burden, and the cost to small businesses of implementing collection, which she correctly understood encompassed much more than just using a software program. She was not alone with her concerns. Chief Justice Roberts and Justices Alito, Kagan and Breyer also signaled some concern, which could pave the way for the retention of Quill, particularly since neither Marty Jackley, South Dakota’s counsel, nor Malcolm Stewart, the deputy solicitor general (South Dakota ceded 10 minutes of its argument time to the solicitor general), appeared to have allayed those concerns. In fact, their view that a single sale of tangible personal property into a state was sufficient to establish the necessary jurisdiction to impose collection obligations on retailers, coupled with the solicitor general’s position that applying the change prospectively would be inconsistent with the judicial role of the Court to interpret the Constitution, not amend it, gave weight to those concerns and may actually spur the Court to retain Quill.
Justice Breyer in a humorous moment said that after reading the each parties’ briefs he thought both sides were right but was struggling to find answers to certain questions given the wide variations in the briefing: would states seek to collect retroactively if Quill is overruled; in the absence of Quill,what jurisdictional standard should apply; and what the costs of compliance would be, leaving open at least the possibility that the Court could remand the case for further development.
One surprise was Justice Ginsburg, who seemed willing to overrule Quill,suggesting it was “obsolete precedent,” joining Justice Gorsuch who, as expected, appeared to be decisively in the kill-Quill camp. Justices Kennedy and Thomas may side with them, but it is a close call as to which side will garner the most votes.
The Court is expected to issue its decision by June.