By Adam Thimmesch
The Supreme Court announced this afternoon that it will hear arguments in South Dakota v. Wayfair, the anti-Quill case that has been fast tracked for the Supreme Court since 2016. That decision means that the physical-presence rule, long-abhorred by states and tax academics, might be coming to an end. Of course, a reversal is not certain, and the Court could uphold that rule after hearing the case on the merits. Regardless of the ultimate outcome, however, the Court agreeing to hear it means that those involved in state taxes will have plenty to write about in the coming months.
For the uninitiated, the basic issue presented in South Dakota v. Wayfair is whether the Supreme Court should overrule the physical-presence limitation that it has placed on states for over fifty years. Under that rule, a state can only require a vendor to collect the state’s sales and use tax if the vendor has some physical presence within its boundaries.
The consequences of that limitation have always been significant, but the lost tax revenue has increased substantially in recent decades given the rise of internet commerce and the ease with which vendors can now exploit the national market. Some estimate that states will lose over $30 billion this year due to that jurisdictional limit. That number is hotly debated (one study critiquing the basis for those calculations can be found here), but the number is significant under any metric. The imposition on state autonomy is also clear, regardless of the ultimate tax losses.
States have attempted for years to soften the impact of the physical presence rule while waiting for reprieve from the Court or Congress. Some have adopted statutes applying attributional nexus theories to entities using related parties or independent contractors to exploit their markets, some have more recently adopted notification and reporting statutes. Even more recently, some have started to require online marketplaces like Amazon, Ebay, and Etsy to collect tax on behalf of the smaller vendors who use those platforms to sell their own goods. South Dakota has gone after this issue more directly.
In 2015, the U.S. Supreme Court decided a case, Direct Marketing Association v. Brohl, that involved a use-tax notice and reporting statute like that noted above. The particular legal issue in that case was not the permissibility of that statute, but a more mundane (to some) jurisdictional issue. Nevertheless, Justice Kenney used the occasion to write a concurring opinion in which he called for “an appropriate case” for the Court to repeal Quill. He did not mince words in expressing his displeasure with the physical-presence rule, calling it “a serious continuing injustice” that was “inflicting extreme harm and unfairness on states.” (His opinion in that case can be found here. A prior discussion that I wrote for State Tax Notes about the DMA case, Justice Kennedy’s opinion, and their impact can be found here.
South Dakota responded to Justice Kennedy’s call to action and enacted a law that requires vendors to collect the state’s tax without regard to their physical presences in the state. The law instead requires tax collection by any vendor who, in the current or prior year, had more than $100,000 of sales into the state, or who engaged in 200 or more transactions with in-state consumers.
The state knew that it was inviting litigation with its statute, and it included many provisions intended to fast track the case to get it before the Supreme Court. (See here for a discussion of the legislation and origins of the current case. I’ve also previously written about South Dakota’s litigation strategy, which involved not defending its own law.) As of today, those efforts have succeeded.
Supreme Court rules dictate that, in normal circumstances, the State will file its merits brief within forty-five days of the order granting the writ of certiorari. That would mean that South Dakota’s merits brief would be due in late February. Respondents’ brief would then be due after another 30 days, and South Dakota would have another 30 days to file a reply. That would take us out to April. It should be a fun spring!
Of course, the arguments to be presented by the parties in their merits briefs should be substantially similar to the arguments that they have already offered. So most of the real fun might not come until the oral arguments. I’m sure that I’ll comment about those on this blog at that time.
I’ve been wrestling with the issues presented by this case for years, and many of my thoughts echo what has been said in what I’ve written, in the general literature about the case, and in the amicus brief that I joined at the petition stage. I’ll offer, however, two quick thoughts about the case that might not be on the immediate radar.
First, it seems inescapable to me that this case will be guided as much by the Court’s general attitude towards the dormant Commerce Clause as it is the arguments regarding Quill or physical presences. The Roberts Court, in particular, has shied away from imposing its own judgment to overrule burdensome, but not discriminatory, state laws. If the Court were to repeal the physical-presence standard in Wayfair, it would have to confront where to go next. The Court’s recent approach in dormant Commerce Clause cases suggests that it might remove nexus from the equation entirely, rather than attempt to bless the South Dakota standard on an economic-nexus theory. That could have an impact that reaches well beyond state sales and use taxes, and it is something to keep an eye on.
Second, it will remain interesting to see whether and how Congress responds. Congress has long considered legislation that would affirmatively define the scope of state taxing power and take this issue from the Court. Will the developments in Wayfair cause Congress to finally act? Will Congress wait to see what the Court does with the case? President Trump is reported to have promised Representative Noem from South Dakota that Congress would adopt a legislative solution this year.
It will be interesting to see whether that occurs and whether and how the timing and form of congressional action is impacted by the Court’s action this morning. I’ve previously explained that the Marketplace Fairness Act may not achieve what it seems to be intended to do. The way that it is written, it would not actually preempt the Court from removing Quill or preempt states from expanding their power beyond that permitted by the Act. Instead, it would merely provide states with a safe harbor to tax certain remote vendors. This all depends, however, on the status of the Court’s doctrine. With that up in the air, Congress would need think very carefully about how it would legislate.
In any event, these are just a couple of things to chew on this weekend. 2018 was already starting as a SALT heavy year given all of the turmoil over the modified SALT deduction, how states are proposing to respond, and whether those responses would work. I would be remiss if I didn’t note that Brian Galle, Daniel Hemel, and Darien Shanske have provided an excellent series of posts on these issues over at Whatever Source Derived. Andy Grewal has also provided a more skeptical view on the Notice & Comment blog from the Yale Journal on Regulation .
For better or worse, the Court’s decision to grant cert in Wayfair just made the year saltier. Cheers!