Last month, the U.S. Supreme Court agreed to hear South Dakota’s direct challenge to Quill v. North Dakota, paving the way for large-scale changes to the existing retail tax structure.[1] The case, South Dakota v. Wayfair, Inc., argues that the 1992 ruling limiting states from taxing remote retailers without a physical presence within the state is obsolete in an e-commerce era.[2]
In Quill, the Court considered whether states could compel use taxes from remote retailers.[3] Generally, a use tax is imposed on retailers for items that are used, consumed, or stored within the state though the underlying purchase occurs out-of-state.[4] It held that retailers must have a physical presence within the taxing state to satisfy the substantial nexus threshold.[5]
By adopting this bright-line rule, the Court hoped to set clear limitations on state taxing authority.[6] Instead though, this attempt has caused considerable confusion because it has a limited scope involving a mail-order company.[7] It could not foresee the rule’s implications on a changing retail landscape, which has been complicated by the rise of e-commerce. [8]
Perhaps in anticipation of this, the Court framed the substantial nexus threshold on the Commerce Clause rather than the Due Process Clause.[9] The Commerce Clause focuses on the structural balance between states and interstate commerce.[10] While Congress cannot violate due process, it has authority over state actions that harm interstate commerce.[11] Using this reasoning, the Court specifically invited Congress to ultimately decide this issue.[12]
However, Congress has yet to provide a clear national framework though proposals have been introduced in almost every session since 2003.[13] In 2013, the Marketplace Fairness Act passed the Senate with a 69-27 vote but never reached the House floor.[14] Many blame House Judiciary Committee Chair Robert Goodlatte, R-Va. for stalling efforts to move the proposal out of the committee for a floor vote. [15] Currently, the Quill standard remains, costing state and local governments an estimated $13 billion in 2017.[16]
States have responded by introducing their own laws or regulations.[17] These attempts have further blurred the bright-line rule in Quill.[18] For example, the Court defined physical-presence as a “small sales force, plant, or office,”[19] but some states expanded this definition to include online retailers with in-state web servers.[20] This inconsistency complicates how tax policies will apply to retailers.[21] This directly counters the policy rationale for passing the physical-presence requirement; that is, to “encourage settled expectations and, in doing so foster[] investment by businesses and individuals.”[22]
Considering this, in Direct Marketing Association v. Brohl, Justice Kennedy suggested it may be time to revisit the Quill standard.[23] He invited the argument that interstate commerce needs to pay a fair share of state taxes, reasoning that in Quill, “the Internet was in its infancy.”[24] Nowadays, it accounts for a substantial percentage of the market, making remote retailers more likely to satisfy the substantial nexus threshold for tax-collection duties.[25]
South Dakota is one of nearly twenty-five states that responded to this invitation.[26] It passed legislation directly challenging the Quill standard.[27] The statute, which was written in the form of a legal brief, required companies exceeding $100,000 in sales to collect 4.5% in sales taxes on purchases made by South Dakota residents.[28]
While stare decisis is an important consideration, the retail industry today is vastly different from that in Quill and likely cannot be defined by physical parameters.[29] Many believe that the Quill standard impedes economic efficiency and investment across state lines.[30] Brick-and-mortar retailers, in particular, argue that this standard gives online retailers a distinct advantage.[31]
Still, some believe that the physical-presence requirement should stand, arguing that the market will force retailers to adjust to online demand by setting up more warehouses across states.[32] In a recent statement, Goodlatte, expressed support for the Court upholding a bright-line physical-presence standard, arguing that “[i]t is crucial that businesses have direct recourse to their regulators in order to maintain a check against overly aggressive state and local governments exporting burdensome regulations on businesses to which those governments have no accountability.”[33]
It is difficult to predict how Justices will revisit the issue of a national remote retail tax. If the Court decides to overrule the physical-presence requirement, states are expected to immediately pass legislation compelling remote retailers to collect and remit use taxes.[34] Contrarily, if the Court upholds the Quill precedent, the decision will largely be left for Congress, and states will be left to navigate the current tax regime for internet retail.[35] Regardless, the holding will have large-scale ramifications on the current national tax scheme.[36]
[1] See Maria Koklanaris, Justices Likely To Set New Tax Standard For Remote Vendors, Law360 (Jan. 15, 2018, 5:07 PM), http://www.law360.com.fordham.proxy.liblynxgateway.com/articles/1002010/justices-likely-to-set-new-tax-standard-for-remote-vendors.
[2] See generally State v. Wayfair Inc., 901 N.W.2d 754 (S.D. 2017).
[3] See generally Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
[4] See Amy Fontinelle, Use Tax, Investopedia, https://www.investopedia.com/terms/u/use-tax.asp. (last visited Feb. 10, 2018).
[5] Quill, 504 U.S. at 311.
[6] See Yilu Zhang, An Analysis of Quill and Federal Remote Sales Tax Legislation, Tax Analysts (July 4, 2016), http://www.taxanalysts.org/content/analysis-quill-and-federal-remote-sales-tax-legislation.
[7] Quill, 504 U.S. at 303.
[8] See generally Maria Koklanaris, U.S. Supreme Court to Consider Internet Retail Taxes’ Reach, Law360 (Jan. 12, 2018, 2:59 PM), http://www.law360.com.fordham.proxy.liblynxgateway.com/articles/999508/us-supreme-court-to-consider-internet-retail-taxes-reach.
[9] See id.; see also Zhang supra, note 6.
[10] Quill, 504 U.S. at 303; see also Zhang supra, note 6.
[11] Quill, 504 U.S. at 303; see also Zhang supra, note 6.
[12] Quill, 504 U.S. at 318. (“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.”).
[13] Paige Jones, Congressional Paralysis Unlikely to End in Time to Tackle Online Sales, Tax Analysts (Jan. 23, 2018), http://www.taxanalysts.org/content/congressional-paralysis-unlikely-end-time-tackle-online-sales.
[14] Id.; see also Jonathon Weisman, Internet Sales Bill Gains Ground in Senate, N.Y. Times (Apr. 23, 2013), http://www.nytimes.com/2013/04/23/technology/internet-sales-tax-gains-ground-in-senate.html.
[15] See Jones, supra, note 12; see also Mario Trujillo & Naomi Jagoda, Online Sales Tax Supporters Hope Gamble Pays Off, The Hill (Feb. 16, 2016), http://thehill.com/policy/technology/269340-online-sales-tax-supporters-hope-gamble-pays-off.; Jennifer McLoughlin, Congress Still Chewing Over Digital Sales Tax Solution, Bloomberg News (Jan. 13, 2013), https://www.bna.com/congress-chewing-digital-n73014449794/.
[16] See Koklanaris supra, note 8.
[17] See Natalie Olivo, Legal Scholars Urge High Court to Undo Online Sales Tax Ban, Law360 (Nov. 2, 2017, 6:42 PM), http://www.law360.com.fordham.proxy.liblynxgateway.com/articles/981321/legal-scholars-urge-high-court-to-undo-online-sales-tax-ban.
[18] See generally Quill Corp. v. North Dakota, 504 U.S. 298, 315 (1992); see also see also Zhang supra, note 6.
[19] See Quill, 504 U.S. at 315; see also Zhang supra, note 6.
[20] See Zhang supra, note 6.
[21] See Quill, 504 U.S. at 316.
[22] Id. at 315.
[23] See Eugene Vologh, Justice Kennedy’s Opinion Supporting States’ Collecting Taxes on Internet/Mail-Order Transactions, Wash. Post (March 3, 2015), https://www.washingtonpost.com/news/volokh-conspiracy/wp/2015/03/03/justice-kennedys-opinion-supporting-states-collecting-taxes-on-internetmail-order-transactions/?utm_term=.03f3c1b3245f.
[24] See Direct Mktg. Ass’n v. Brohl, 135 S. Ct. 1124, 1135 (2015) (Kennedy, J., concurring) (“But in 1992, the Internet was in its infancy. By 2008, e-commerce sales alone totaled $3.16 trillion per year in the United States”).
[25]Id.
[26] See Koklanaris, supra, note 1; see also Olivo, supra note 16.
[27] See Olivo, supra note 16.
[28] Id.; see also State v. Wayfair Inc., 901 N.W.2d 754, 758 (S.D. 2017); Vidya Kauri, Tax on Out-of-State Retailers Nixed by SD Justices, Law360 (Sept. 14, 2017, 11:27 AM), http://www.law360.com.fordham.proxy.liblynxgateway.com/articles/963908/tax-on-out-of-state-retailers-nixed-by-sd-justices.
[29] See Olivo, supra note 16.
[30] See Koklanaris, supra note 1.
[31] Id.
[32] Id.; see also Jones, supra note 12.
[33] See Jones, supra note 12.
[34] See Koklanaris, supra note 1.
[35] Id.
[36] Id.
