Undue Burdens and the Retroactivity Issue in Wayfair

By Adam Thimmesch

The major question presented in South Dakota v. Wayfair is whether the Supreme Court should overturn its long-standing physical presence limitation on state taxing power. (I believe that it should, as do most people who have studied the issue.) One of the secondary issues presented in Wayfair is whether the Court could apply such a repeal on a prospective basis only or whether a repeal would have to apply retroactively. Daniel Hemel had a great post introducing this issue last month, but I think that it is worth adding another dimension to the analysis.

The retroactivity issue presents itself as obvious in some respects—why couldn’t the Court issue a prospective only decision? And yet, this issue has troubled the Court, and it appeared as a consideration in Quill itself. The retroactivity issue is also being addressed in the briefs in the case (South Dakota’s merits brief was filed on Monday), and the Court is sure to bring up the issue in oral arguments in April. It seems possible that the Court would have enough votes to overturn Quill on its merits, but that no clear majority would appear regarding the retroactivity of its holding. Worst case, disagreement about that issue could cause some Justices to get cold feet on the primary issue. For these reasons, it is worth exploring retroactivity from a couple of different angles.

The Appropriateness of Prospectivity

I don’t want to use this post to lay out the doctrinal foundations of the Court’s retroactivity position. Daniel walked though that quite well, and I highly recommend that interested readers give his post a thorough review. He provides a very good explanation of the positive law on this issue, and I agree that the Court would be well within its power and precedent to issue a prospective-only ruling. (A very interested reader could also note that a plurality of the Court did apply a tax ruling on a prospective basis in American Trucking Associations, Inc. v. Smith, 496 U.S. 167 (1990).)

I also think it worth nothing that the argument against retroactivity is especially compelling in the context of Wayfair. To start, any judicial action under the dormant Commerce Clause is necessarily quasi-legislative in nature. That alone justifies a different approach.[1]

Second, the Court’s tax cases that have applied new rulings retroactively generally involve statutes that were held to be unconstitutionally discriminatory against interstate commerce. For example, in Bacchus Imports, Ltd. v. Dias, 468 U.S. 263, (1984), the Court struck down a discriminatory liquor tax. It found that the case applied retroactively in James B. Beam Distilling Co. v. Georgia, 501 U.S. 529 (1991). In Davis v. Michigan Department of Treasury, 489 U.S. 803 (1989), it found that a state’s tax benefit discriminated against federal retirees in violation of the principal of intergovernmental tax immunity. The Court found that case to be of retroactive impact in Harper v. Virginia Department of Taxation, 509 US 86 (1993). Even American Trucking Associations, referred to above, involved a discriminatory state statute.

It is important to recognize that the Court’s retroactivity cases in the state-tax area have arisen in the anti-discrimination context, because those cases therefore necessarily involve harm created by states. A ruling for South Dakota in Wayfair would be fundamentally different. Any ruling overturning Quill would necessarily be blessing state action and impugning the Court’s prior rulings. Under a Scalian view, the Court would be determining that the Constitution has never limited states from imposing tax-collection obligations on remote vendors.[2] But if that is the case, then retroactivity would be imposing costs on vendors because of the Court’s prior “misreading” of the Constitution. That would be troubling. If nothing else, then, the Could should issue a prospective-only ruling in Wayfair to protect interstate commerce from its own prior acts.

Taken together, the legal issue and the factual posture presented in Wayfair are sufficiently different from the traditional cases that come before the Court that a prospective-only ruling is more than justified. However, even if a majority of the Justices do not agree, I concur with Daniel that the Court need not fear states imposing use-tax collection obligations retroactively to the detriment of vendors and to interstate commerce. My argument differs slightly from his though.

The Burden of Retroactivity

I previously blogged my thoughts on the merits of the State’s position in Wayfair and the proper resolution of the case. In summary, I view use-tax collection obligations as any other state regulatory burden and argue that the Court should apply its traditional dormant Commerce Clause framework to those obligations rather than its tax-specific standard as compiled in Complete Auto.

That approach provides many benefits that I more fully explain in a forthcoming essay. It also may provide concerned Justices with another avenue for avoiding the costs of retroactivity without issuing a prospective-only ruling. To start, the issue with retroactivity is that vendors who have relied on the physical presence rule could find themselves liable for years of back taxes that they otherwise could have collected from their customers—any maybe even have received compensation for doing so under states’ vendor-compensation programs. If states were to apply a Quill reversal retroactively, they could require retailers to come up with the funds to pay those taxes without any real opportunity to offset that cost in those ways.

Daniel’s blog post focuses on the potential for double taxation or discrimination if states were to do this, and I agree that it would occur. Some consumers have already paid their state use tax on their online purchases, and it is unlikely that those consumers would either (1) know that their vendors had been assessed taxes retroactively on that same purchase or (2) successfully file refund claims for any amounts that were double taxed. The potential double taxation of interstate commerce is thus very real and should prevent states from imposing retroactive liabilities under the Court’s current doctrine.

But there is a bigger issue here as well—the very real cost that retroactive state enforcement would impose on remote vendors. If the Court had not previously blocked states from requiring them to collect tax, those vendors could have done so at the time of sale. They would have passed that cost right on to their customers just like every law-abiding, in-state retailer did. Requiring remote vendors to pay back tax after Wayfair would deprive them of that opportunity and would impose on them a very real economic burden.

Undue Burdens, Pike, and Retroactive Liability

Fortunately, the Court has an existing doctrinal solution to that problem—its Pike balancing standard. Under Pike v. Bruce Church, 397 U.S. 137 (1970), the Court will strike down state statutes if the burden that they impose is “clearly excessive in relation to the putative local benefits.” This test is intended to identify state regulations that go “too far” and that thus unduly burden interstate commerce. The Pike standard is notoriously difficult to apply or even firmly conceptualize. However, the imposition of retroactive liabilities only on vendors engaged in interstate commerce specifically for taxes that were previously prohibited by the Supreme Court would almost certainly qualify as undue burdens on interstate commerce.

First, the burden of such a move would be very real and very costly. Online retailers often have very slim margins, and asking them to pay past taxes out of their earnings without an opportunity to pass that cost along to their customers would be the death knell for many vendors and significantly harm many others. If current estimates are to be believed, we are talking about liabilities in the tens of billions of dollars per year. Multiply that by decades of noncollection, and we are talking about a huge problem.

That burden is also particularly undue because it would arise not from those retailers’ own ignorance of the law or from their own aggressive tax positions, but from their reliance on the Court and its prevailing constitutional interpretation. Again, this is not a case where retroactivity would serve to make states atone for their own bad acts. This is a case where any harm done would have been done by the Court. The burden of retroactive taxation is particularly undue in that situation. (Of course, it also should not go without mention that this whole issue is hypothetical at this point. No state has threatened to impose retroactive liabilities, and the prevailing statutory approach being adopted by states, which is modeled on the South Dakota law, applies on a prospective basis. Any discussion of retroactivity would thus be outside of the issues presented in Wayfair, and the Court could avoid the issue all together.)

Multiple Paths to Avoid Retroactive Liability

In the end, the best course of action in this situation would be for the Court to (1) strike down Quill using the rationale that I previously laid out in my prior post and in the forthcoming essay referenced above, (2) clearly state that South Dakota’s statute does not present a retroactivity problem because of its own prospectivity, and (3) clearly state (or strongly indicate) that its holding was prospective only. Its second-best option would be to follow the same path on the merits, but to make clear that states would be unable to impose retroactive liabilities without violating some aspect of the Court’s dormant Commerce Clause doctrine. It could also uphold the South Dakota formulation specifically because it was prospective only and tell states that retroactive statutes would not be assured of the same blessing.

Either of the latter approaches would allow the Court to achieve the result of a prospective ruling while not actually having to make that judgment. In any case, though, a reversal of Quill would not mean a world of unfettered state power and retroactive liability for vendors who have relied upon the physical-presence rule. A more rational result can easily be obtained.

[1] The default position for legislative enactments is that they apply prospectively. Landgraf v. USI Film Prod., 511 U.S. 244, 265, (1994) (“the presumption against retroactive legislation is deeply rooted in our jurisprudence, and embodies a legal doctrine centuries older than our Republic”).

[2] See American Trucking Ass’ns, Inc. v. Smith, 496 U.S. 167, 201 (1990) (Scalia, J., concurring) (noting that “prospective decisionmaking is incompatible with the judicial role, which is to say what the law is, not to prescribe what it shall be”).

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