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.
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.
As I’ve previously blogged, the Supreme Court granted certiorari in South Dakota v. Wayfair last month. The question presented in the cert petition was whether the Court should overrule the physical-presence rule of Quill. For most folks, the resolution of the case will be felt most directly in whether their favorite online stores start to collect use tax on their purchases. (If your favorite vendor is Amazon, fear not, you’re already paying…at least on some of your purchases.) For states, it could mean an infusion of tax revenue at a time when many are struggling with budget issues…or maybe they will use the funds to pay for President Trump’s infrastructure plan.
The primary issue in Wayfair is whether the Court should abandon its long-standing physical-presence rule. That rule dates back to the Court’s early regulation of states and how they taxed the itinerant drummers and mail-order companies of the 1800s and early 1900s. The Court originally imposed that jurisdictional limitation under both the Due Process and dormant Commerce Clauses, but it abandoned the former with its 1967 decision in National Bellas Hess v. Illinois. (Lawyers reading this post should remember something about personal jurisdiction and the Court’s move away from a physical-presences test for purposes of that concept during this same time frame.)
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.
Sometimes we do get what we are seeking. In some of my recent work on the sharing economy I have advocated for more discussion and analysis across legal boundaries, so that the rules we develop have outcomes that more closely match our goals and don’t bring unexpected—and undesired—surprises. The two-day conference on “Sharing Economy: Markets & Human Rights” that I have been attending at the College of Law and Business in Ramat Gan, Israel has provided just such an opportunity. The papers presented cover a wide range of legal fields and issues from taxation to discrimination, and will ultimately be published together in the Law & Ethics of Human Rights Journal. Although we are all benefiting from the discussion of our drafts and will continue to revise our work, some interesting themes have emerged already . . .
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…)
For a few years now, I’ve gently pushed the idea of Use Tax Tuesday to follow Cyber Monday. Why not follow one of the biggest tax-avoidance days of the year with a day dedicated to undoing that damage? As much as this makes sense to me, it appears that I have lost out to Giving Tuesday, and probably rightfully so. Nevertheless, I want to suggest that Use Tax Tuesday can easily be folded within the more general ambit of Giving Tuesday. Maybe all is not lost.
The treatment of the state and local tax deduction under the GOP’s tax bill has gotten a lot of attention since the bill’s roll out last week. All else being equal, the proposed changes would disproportionately impact high-income taxpayers in blue states, and that issue is front and center in discussions about the bill. The TCJA is also noteworthy, however, in that it does not propose completely eliminating the SALT deduction as had been previously discussed. Instead, it contains a partial repeal for some taxpayers. That creates some noteworthy distortions that might escape the attention of the average person following these discussions.
The Supreme Court of South Dakota heard oral arguments in South Dakota v. Wayfair, Inc. earlier this week. That case involves a challenge to a South Dakota statute that requires vendors to collect the state’s use tax based solely on their economic connections with the state—a requirement that seems to directly contradict the rule embraced by the Supreme Court in Quill Corporation v. North Dakota. What was unusual about the case is that the state argued that it should lose. You don’t run into that every day.
Today and tomorrow are 7-Eleven’s annual Bring Your Own Cup Day. In case you’re not familiar with it (or your Facebook feeds aren’t filled with bizarre containers of florescent sugar-ice), on #BYOCupDay, you can bring any container in your house to a 7-Eleven and, as long as it fits in the Slurpee machine, you can fill it up for $1.50.
After my wife and kids spent the day on the beach watching the Air and Water Show rehearsal, they were ready for some Slurpee. So, when I got out of work, we walked the three blocks to the nearest 7-Eleven. (Last year, we took berry-picking buckets; this year, we were much more modest and just brought cups my father-in-law bought when we took him to a Cubs game a couple years ago.)