Opening Volleys in South Dakota v. Wayfair

By Adam Thimmesch

Much of the tax world is currently focused on federal tax reform, and rightfully so. The speed with which the Republicans are pushing a bill through Congress has required an intense burst of attention, and academics evaluating the bill have already noted and written on number of glitches and loopholes in the current bills. (Full paper here.) While this is all occurring, though, a significant case is being pitched to the U.S. Supreme Court—South Dakota v. Wayfair. That case involves the Court’s physical-presence rule and the ongoing fight between states and retailers regarding the collection of use tax on online sales. This could be one of the most significant state tax cases heard by the Supreme Court in decades. Unfortunately, it is fighting for press against federal tax reform. Bad timing.

I’ve blogged about this dispute before, so I don’t want to rehash all of the history of Quill and the issues related to collecting use taxes on online commerce. However, both the Petition for Writ of Certiorari and the Respondents’ Brief in Opposition have now been filed (the Petition was filed by the State of South Dakota on October 2nd and the Respondents’ Brief in Opposition was filed last Thursday), so I thought that it might be helpful to summarize the major arguments made by both sides in their filings and to foreshadow some of the arguments to come. (Warning, this gets long even as a summary…)

Arguments in the Petition for Certiorari

The Petition offers three primary arguments in favor of the Court granting cert: (1) the “exceptional” importance of the issue; (2) the lack of a compelling reason to keep Quill; and (3) the immediacy of the issue.

Exceptional Importance

South Dakota argues that the case is of exceptional importance because of its impact on (1) states; (2) brick-and-mortar retailers; and (3) interstate commerce. With regard to the first, Petitioner specifically cites one study that estimates the revenue losses to those governments at nearly $35 billion in 2018. That figure is hotly debated, and respondents balk at that number in their response (see more below).

The second impact is relatively well understood—the physical presence rule puts local businesses at an effective pricing disadvantage compared to their online peers. Petitioner notes that this is plainly improper and that it is inconsistent with the Court’s modern dormant Commerce Clause doctrine.

The Court used to specially protect interstate commerce from state taxation, but the more modern view is that states have “a significant interest in exacting from interstate commerce its fair share of the cost of state government,” and that “interstate business must pay its way.”[1]

The third argument rests on recognizing that the physical-presence rule might encourage interstate sales of goods sold online or in catalogs, but that it simultaneously discourages interstate investments by retailers. The physical-presence rule effective provides a tax penalty for firms that hire market-state workers or that acquire or hold property in those states.

An Infirm Quill

The Petition then moves to its more direct substantive arguments against Quill, arguing that the decision was simply incorrect and that the Court should not feel bound by stare decisis. The arguments that it offers in this section are not new. The physical-presence rule has been critiqued for decades. Those arguments range from those that highlight certain Justice’s unease with the dormant Commerce Clause more generally to those that rely on the changes that have occurred in technology and commerce since 1992.

The Petition takes special care with respect to its argument that the principles underlying stare decisis do not compel its application in this case. (Daniel Hemel wrote a nice piece about this aspect of the case here.) Essentially, the argument is that stare decisis holds less weight in constitutional cases, that there are no legitimate reliance interests, that circumstances have changed since 1992, that Quill has been consistently critiqued by judges, and that experience has not shown the physical-presence rule to work as intended.

Immediate Review Needed

The final category of argument offered by the Petitioner is based on the importance of a quick resolution. The Petition repeats its focus on the dramatic financial impact that the rule is having on states and also notes the significant legislative and judicial activity that is occurring across the country. The petition also points out that Justice Kennedy explicitly invited a case like this one and that the case was tailor made for review.

Arguments in Respondents’ Brief in Opposition

The Respondents’ brief contains five major arguments:

(1) That Congress is the appropriate body of government to handle this issue;

(2) That the state’s challenge is nonjusticiable;

(3) That principles of stare decisis weigh against granting certiorari;

(4) That the possibility of retroactive liabilities is problematic and not addressed by the Petitioner; and

(5) That recent developments have undercut the argument that federal attention is necessary.

These all deserve lengthier treatment than a blog post can offer, but they are fleshed out a bit in the following paragraphs.

Congress as Proper Body

The Respondents first argue that Congress, and not the Court, has the institutional expertise and capacity to consider the countervailing interests at issue in Wayfair. They also point to the efforts of Congress to craft legislation that would address Quill, especially those in the last five years. They blame Congress’ failure to pass a bill partially on states (for their failure to “accept any simplification measures not designed by the states themselves”), and argue that a ruling by the Court would “damage prospects for a legislative solution.” It does not explain why either proposition is true.

The latter point is made with a reference to an amicus brief filed by Representative Goodlatte, Senator Wyden, and other members of Congress. That brief deserves its own treatment, but it is referenced throughout the Respondents’ brief. A major theme of the Respondents’ brief is that the Court should stay its hand because Congress is already working on the issue, and the Goodlatte brief is important to making that case. (I’ll admit heavy skepticism with respect to this point, but I’ll offer more on that in a later post. For now, here is one take and brief discussion of that brief.)


Respondents next argue that the Court does not have jurisdiction to hear the case because there is a lack of a case or controversy. They argue that Petitioner has not shown that that a case or controversy exists because Petitioner failed to develop an adequate record in the proceedings below. (I discussed this litigation tactic earlier on this blog.) The Respondents liken the Petitioner’s approach to requesting a declaratory judgment from the Court.

Stare Decisis Favors the Status Quo

Not surprisingly, Respondents’ brief rests heavily on stare decisis and evaluates the impact of that doctrine very differently than the Petitioner does. Respondents specifically refer to Justice Scalia’s statement in Quill that stare decisis is of greater force under the dormant Commerce Clause because Congress is always free to overrule the Court’s judgment. (This, of course, runs counter to Hemel’s analysis linked above.) The brief then repeats some of its prior discussion regarding Congress’ ongoing efforts and its competency to handle this issue.

Respondents also argue that retailers’ reliance on Quill is real and should be protected—even if that reliance is unfair as Petitioner argues. In addition, they argue that Quill has been favorably cited by the Court in recent years, that it wasn’t badly reasoned, that it isn’t unworkable, and that changed circumstances haven’t undermined it badly enough to be overturned. It addresses the last of these in greatest detail.

On that point, Respondents argue: (1) that multistate tax obligations are still very costly, (2) that states are overestimating their revenue losses, and (3) that local businesses actually benefit from online vendors. The last point is made by reference to a practice called “webrooming” (which acts to counter the effects of “showrooming). Essentially, they point to data showing that many consumers use websites to research a product, but end up buying the product from a local retailer. The sum of these factors, Respondents say, is enough for the Court to rest on stare decisis and to reject the petition.


Respondents also point out that overruling the physical-presence rule could lead to significant liabilities for retailers who have not been collecting use taxes under the protection of Quill.

Although South Dakota has decided to not pursue vendors for those taxes, Respondents argue that other states may not exercise such restraint. That, according to Respondents, is untenable, especially when Congress could act on a prospective basis only.

Developments in Other States

The final argument offered by Respondents is that developments in states other than South Dakota undermine the need for the Court to act. First, they point to states’ efforts and increased abilities to collect use taxes from consumers—particularly states’ new information and reporting laws. They point to these developments as proof that states can solve the online sales tax issue without needing Quill overruled. They do this by citing a State Tax Notes piece that I recently co-wrote with David Gamage and Darien Shanske. (That piece is based on longer earlier work where I argue that attention to consumer compliance is not only warranted, but that states have many options for doing so.)

I don’t want this post to be focused on critiquing the brief, so I’ll just say at this point that they don’t quite follow the essence of my work on use-tax compliance. The point of that work is that states should, and can, do more to promote individual compliance. That is a far cry, however, from concluding that that states can do enough.  That distinction is important.

The brief concludes by pointing to cases that are pending in other states that would provide better vehicles, in Respondents’ view, for the Court to review Quill.

Amicus Briefs

In addition to the Petition and Respondents’ Brief in Opposition, twenty-one amicus briefs have been filed. Those include briefs by tax professors (in the interest of full disclosure, I did join that brief), by thirty-five states and the District of Columbia, the National Governors Association, the Multistate Tax Commission, the Tax Foundation, members of Congress, and the Americans for Tax Reform. (All of the briefs can be found here.)

This post is long enough already, so I won’t get into those brief here. Fear not, though, you can certainly expect more analysis of these briefs and more discussion of Wayfair in the coming months. At the very least, there is something going on in tax other than the Tax Cuts and Jobs Act.


[1] Commonwealth Edison Co. v. Montana, 453 U.S. 609, 616 (1981).


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