Written by Lisa Gunter
Earlier this month, the Supreme Court agreed to hear South Dakota v. Wayfair, Inc. (S.D. 2017), a case that has the possibility to fundamentally change the circumstances in which online sales taxes must be collected, not only in South Dakota but nationwide. In Wayfair, South Dakota seeks to overturn Quill v. North Dakota, a 1992 Supreme Court ruling that South Dakota calls outdated. Quill involved an out-of-state office supply retailer that sold floppy disks without charging sales tax. The Quill Court held that a state cannot require a retailer to collect sales tax from a customer unless that retailer has a physical presence in the state. The state of South Dakota argues that the reasoning and logic used in Quill has largely gone the way of the floppy disk.
In Quill, the Supreme Court held that under the Commerce Clause, the existence of customers in a state alone did not create the sufficient nexus for North Dakota to impose a sales tax. Instead, a taxpayer must have a physical presence (e.g., offices, branches, warehouses, employees) in a state to require collection of sales tax for purchases made by in-state customers. This reasoning was at least partially based on the fact that in 1992, there were over 6,000 separate sales and use tax jurisdictions in the U.S. and to impose a sales tax collection obligation on a remote seller would be far too much of a burden. The Supreme Court held that any change to such a scheme was a task for Congress.
However, in a 2015 case involving a similar issue, Justice Kennedy penned a concurrence stating that the Court should reevaluate Quill in light of “changes in technology and consumer sophistication.” As a direct response to Kennedy’s concurrence and as a direct challenge to the precedent set in Quill, South Dakota passed a law requiring the collection of sales tax from certain remote sellers and brought suit against retailers who did not comply. Consequently, Wayfair, Inc., an online furniture retailer, along with other similarly-situated online retailers, challenged the statute as unconstitutional in light of Quill.
Ruling in favor of South Dakota would require the Supreme Court to explicitly overturn the Quill ruling, a seemingly tough ask. However, in addition to Justice Kennedy, then-Federal Appellate Judge Gorsuch stated in Direct Marketing Associationn v. Brohl that the Quill decision had an “expiration date” and that it seemed “deliberately designed to . . . wash away with the tides of time.” Thus, there seem to be at least two Justices strongly in favor of South Dakota’s argument. However, the direction in which the remaining votes will fall seems largely up for debate and will be something to watch closely in the coming months.
The outcome of Wayfair will have tremendous ramifications for all online retailers, as well as all consumers who shop online. While certain online retailers, like Amazon, have individually made the decision to collect sales taxes in all states, the majority do not currently collect sales taxes in jurisdictions in which they have no physical presence. The U.S. Government Accountability Office estimated in a November report that states and municipalities could gain between $8 billion and $13 billion in annual revenue if they could require online retailers to collect sales tax. A ruling in favor of South Dakota would allow states to tap this currently inaccessible, and ever-growing, source of potential revenue. Additionally, traditional brick-and-mortar retailers argue that this would help even the playing field between them and online retailers, as it would require both types of businesses to levy sales taxes on customers.
The Supreme Court is expected to hear oral argument in Wayfair in April.