The Workability of Pike Balancing for Sales and Use Tax Collection Obligations

Hayes Holderness
Assistant Professor
University of Richmond School of Law

As covered in earlier posts (here, here, here, and here), the Supreme Court is currently considering the case of South Dakota v. Wayfair Inc., which calls into question the physical presence rule for sales and use tax collection obligations. This rule holds that a state cannot require a person to collect the state’s sales and use taxes unless that person has a physical presence in the state; the rule was justified as a way to prevent undue burdens on interstate commerce. On March 28th, Wayfair filed its brief with the Court laying out its argument for retaining the physical presence rule.

The arguments in Wayfair’s brief are mostly expected: that state and local sales and use tax systems are still too complex and varying to expand taxing authority to remote vendors, that the dollars at stake are relatively small and declining, and that the physical presence rule benefits small vendors who would otherwise be unable to meaningfully engage in interstate commerce. However, one section of Wayfair’s brief addresses the argument of many amici that the balancing test from Pike v. Bruce Church, Inc., 397 U.S. 137 (1970), should replace the physical presence rule going forward. (Surly Blogger Adam Thimmesch has been at the forefront of these arguments.) Wayfair pulls no punches—it argues that Pike balancing would be “fundamentally unworkable for addressing the burdens of state sales tax collection,” i.e., that it would be unable to prevent undue burdens on interstate commerce in this context.

Pike balancing requires a court to determine whether even-handed state regulations effectuating “a legitimate local public interest” impose a burden on interstate commerce that is “clearly excessive in relation to the putative local benefits.” Importantly, “the extent of the burden that will be tolerated will of course depend on the nature of the local interest involved, and on whether it could be promoted as well with a lesser impact on interstate activities.” Relying on Department of Revenue of Kentucky v. Davis, 553 U.S. 328 (2008), Wayfair argues that “the widespread adoption of sales taxes nationwide requires examination of the aggregate burdens on the national economy of imposing sales tax collection obligations across thousands of potential taxing jurisdictions” and that “[s]uch an analysis is incompatible with Pike” because courts are ill-suited to make cost-benefit analyses and reach answers in this context.

I’d like to raise a few issues with this argument. First, Davis endorses the use of Pike balancing for state tax obligations and even indicates that state taxation is a quintessential local function worthy of a high level of deference under the test. Further, Pike balancing is capable of considering the aggregate burdens of sales and use tax collection obligations when appropriate. In fact, using Pike balancing in this context would bring the analysis of these obligations more in line with other state and local tax jurisprudence.

High Deference for State and Local Tax Actions

The Davis Court upheld provisions of Kentucky’s tax code which excluded from the state income tax base income from bonds issued by the state and its localities but which did not exclude income from bonds issued by other states and their localities. In reaching its decision, the Supreme Court applied its “nontax” dormant Commerce Clause test—Pike balancing. Given this clear endorsement of Pike balancing in Davis, the case offers an unstable foundation for Wayfair’s attack.

Notably, the Davis court indicated that courts should be wary in intruding on the tax power specifically because taxation is a fundamental state interest. That is to say, there are massive benefits to a state in being able to exercise the tax power, so fairly significant burdens on interstate commerce would have to exist in order for a state tax action to fail under Pike balancing.

It is true, as Wayfair states, that the Davis court also opined that:

[w]hat is most significant about [Pike balancing] questions is not even the difficulty of answering them or the inevitable uncertainty of the predictions that might be made in trying to come up with answers, but the unsuitability of the judicial process and judicial forums for making whatever predictions and reaching whatever answers are possible at all.”

But what Wayfair fails to observe is that this language in Davis addressed the Davises’ inability to provide the Court with enough certain data about the economic burdens of the municipal bond provisions to win on Pike balancing; the point was not that Pike balancing should not be applied generally.[1] In other words, with such a fundamental state power as taxation at issue, the data on burdens must be clear before the Court strikes down the state action as placing an undue burden on interstate commerce because.

Pike Balancing and Aggregate Burdens

Does this mean vendors are doomed to fail under Pike balancing? Not necessarily. The question under Pike balancing would be whether the burden of the state’s collection obligation on the particular vendor outweighed the state’s interest in tax collection. Given the fundamental nature of the tax power, the test should be expected to generally favor a state’s actions. This deference to state tax power would not be all that peculiar; the Court has often been reluctant to infringe on state tax actions in other contexts.

The burdens placed on the vendor are relevant because they are the burdens on interstate commerce in this context. Therefore, before it had a case under Pike balancing, the vendor would need to engage in interstate commerce and the burdens imposed by the state would need to threaten the vendor’s ability to continue to engage in interstate commerce. The burdens of sales and use tax collection may be clearer to calculate than the burdens at issue in Davis, but complexity would remain.[2] Regardless, outside of some extreme case, the burdens imposed by any one state when viewed in isolation seem unlikely to outweigh the state’s interest in its tax power. A vendor’s path to victory instead depends on what other states are doing.

One way other states’ actions are relevant is that they establish who the vendor is. A vendor that is subject to many compliance burdens is more at risk of having its ability to engage in interstate commerce threatened by one state’s actions. Though it is not clear that Pike itself meant for the aggregate burdens from all states on a taxpayer to be considered when judging one state’s actions, there is arguably room for such considerations. In fact, Quill appeared to view the physical presence rule as a shortcut through Pike balancing designed to relieve the Court of figuring out such aggregate burdens.

However, for one state to be held accountable, the aggregate undue burden would have to be shown and the vendor would need to show that the state was a significant outlier causing the undue burden, at least if other state tax jurisprudence is any guide. As the Supreme Court observed in Moorman Manufacturing Company v. Bair, 437 US 267 (1978), “it would be an exercise in formalism to declare appellant’s income tax assessment unconstitutional based on speculative concerns with multiple taxation.” To put it mildly, this wouldn’t be the easiest road to victory for a vendor.

A more encouraging route for vendors lies in Pike balancing’s look at whether the local interest “could be promoted as well with a lesser impact on interstate activities.” States whose compliance regimes are significantly out-of-line with more cost-effective jurisdictions would be in danger of losing under this part of Pike balancing. To show how a state could promote its interest in tax collection with “lesser impact on interstate commerce,” a vendor might point to tax code simplification efforts such as those under the Streamlined Sales and Use Tax Agreement or to states assuming the costs of collection as proposed by David Gamage and Devin Heckman.

There will be hard cases, but through considering the actual burdens placed on vendors and opportunities for lowering those burdens, Pike balancing offers a test for the constitutionality of sales and use tax collection obligations that is far more capable of demonstrating undue burdens on interstate commerce than the physical presence test. And to be clear, the remedy here is that the one vendor and others like it couldn’t be made to collect the state’s taxes, not that the state’s collection obligation would be generally invalid.

Pike Balancing Is Workable

For these reasons, the Wayfair brief misses the mark when it argues that Pike balancing could not apply in this context. The authority Wayfair relies on for its argument supports rather than discourages the use of Pike balancing. Though state tax power should be owed great deference by courts in a Pike balancing analysis, there is reason to believe that a Pike balancing regime could push states in the direction of simplicity and uniformity that vendors have long sought. Pike balancing is workable here.


[1] Indeed, the Court passed on this question. See Department of Revenue of Ky. v. Davis, 553 U.S. 328, 353 (2008) (“The Davises’ request for Pike balancing assumes an answer to an open question: whether Pike even applies to a case of this sort. . . . We need not decide this question today, however, for Kentucky has not argued that Pike is irrelevant, and even on the assumption that a Pike examination might generally be in order in this type of case, the current record and scholarly material convince us that the Judicial Branch is not institutionally suited to draw reliable conclusions of the kind that would be necessary for the Davises to satisfy a Pike burden in this particular case.”) (internal citations omitted).

[2] For a discussion of issues surrounding the valuation of the burdens of sales and use tax collection, see Adam B. Thimmesch, A Unifying Approach To Nexus Under The Dormant Commerce Clause, Mich. L. Rev. Online (2018).

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