WASHINGTON — Antiquated, incorrect, obsolete. These were all words Supreme Court justices used Tuesday to describe the ruling in an over 25-year-old precedent being reconsidered in one of the most contentious retail policy fights today.
The justices expressed broad agreement that the 1992 ruling in Quill v. North Dakota — which put in place a physical presence standard for sales tax collection — was an unforeseeable poor decision given the eventual rise of e-commerce. But that doesn't mean they're ready to overturn it.
A number of justices seem reluctant to cede on precedent, despite specifically asking for a case on the issue as litigation heated up across states over the last few years.
During a one-hour session in which the justices heard oral arguments for South Dakota v. Wayfair on Tuesday, Justice Sonia Sotomayor (whose arm was in a sling due to a fall Monday) said scrapping Quill would be "fraught with difficulties," and could prompt a slew of lawsuits, among other consequences.
But it is, in fact, the volume of lawsuits that springboarded the issue back to the bench. Sotomayor pointed to several specific concerns about South Dakota's proposed law, which favors an economic standard that would require state sales tax collection and remittance only if an online seller does more than $100,000 worth of business, or processes more than 200 transactions in the state.
"I'm concerned about the many unanswered questions that overturning precedents will create a massive amount of lawsuits about."
Sonia Sotomayor
Supreme Court Justice
"I'm concerned about the many unanswered questions that overturning precedents will create a massive amount of lawsuits about," she said, pointing to issues of retroactive liabilities, compliance costs and standards of contact. "What happens when the tax program breaks down, as it already has for the states who are using it, and merchants can't keep track of who they've sold to?"
Further, many justices struggled to grasp the true facts of the case, prompting many to wonder whether the judicial branch is the right arm of the government to tackle the case. Many onlookers, as well as those directly involved, say it's time for Congress to provide a legislative solution that gets states their owed taxes while limiting the burdens on businesses and consumers.
"When I read your briefs, I thought absolutely right," said Justice Stephen Breyer. "And then I read through the other briefs and I thought absolutely right. And you cannot both be absolutely right. So why is it... you have wildly different estimates of costs, revenues and what states are losing or not?"
The justices will wrestle with these and many other unanswered questions in the months to come before a decision is expected in June. Here's a look at some of the biggest.
Is South Dakota's law a model for other states?
It only took Senator Deb Peters (R-SD) about 10 minutes to pitch SB106 to the South Dakota state legislature. There were no questions, it was a simple process, Peters recalled during a panel on Tuesday hosted by the Retail Industry Leaders Association after the oral arguments on the bill that was eventually signed into law. "Once Justice Kennedy opened the door, we went for it," she said. And now many wonder if other states will follow suit.
For South Dakota, the bill became seen as a critical work around for a state without income taxes that depends on consumption taxes to supply the vast majority of state revenue. As that revenue began to fall and e-commerce rose, Peters said it was time to update the tax laws.
The South Dakota law, defended by South Dakota Attorney General Marty Jackley before the Supreme Court on Tuesday, is considered by many to be the best case scenario to reconsider Quill. And nearly all states with a sales tax levy have jumped on board, signing an amicus brief in support of South Dakota's law filed by the state of Colorado. In the best case scenario, Peters added, the Supreme Court would rule that all other states follow the South Dakota model. But justices expressed concern over how they ensure states don't approach the issue in a more aggressive way.
Issuing a favorable opinion on the South Dakota law may be enough to encourage states to issue reasonable laws, Deborah White, senior executive vice president and general counsel at RILA and president of the Retail Litigation Center, said during a separate panel on the issue Tuesday.
"If [the justices] uphold South Dakota's law as constitutional and they recognize in doing that it has a lot of features that make it acceptable to the [Supreme Court], such as a reasonable threshold limit, the fact that it's not retroactive, those sorts of things, it's likely to encourage other states to follow suit — particularly since so many other states have laws like that on the books."
In the coming months, other states may file similar laws to go into effect after the justices rule, according to Clark Calhoun, a state and local tax partner at Alston & Bird. Despite the assumed favorability of the case, Calhoun (who filed an amicus brief in favor of Wayfair) said a new standard may not be the best option.
"Just reading the tea leaves from oral, I don't think there are enough justices who are confident in imposing this new standard to reset the debate at the congressional level," he said. "I think they are too uneasy with the uncertainty of imposing a new standard when Congress has been looking at this."
What action should Congress take?
One of the few things both sides can agree on is that after 26 years, Congress is overdue for action on the case. While both sides have worked on legislation, compromise has been elusive.
To Justice Elena Kagan, that means something. "This is not the kind of issue where you say: Well, [it] probably didn't get on Congress's radar screen or maybe Congress was too busy doing other things," she said. "This is a very prominent issue which Congress has been aware of for a very long time and has chosen not to do something about."
In a friend of the court brief, several members of Congress said they were about to act, but held off because the case came before the Supreme Court. Justice Breyer seemed to suggest that states do more to urge members of Congress to move forward. "You are 50 states. If you do not have the power to get Congress do something, I do not know who would," he said.
"This is a very prominent issue which Congress has been aware of for a very long time and has chosen not to do something about that."
Elena Kagan
Supreme Court Justice
In response, Jackley said Congress does not have an incentive to act on something that could be perceived as a tax when they don't have an opportunity to use the revenue.
The question will ultimately be complicated by the decision the Supreme Court makes. For instance, if it overturns Quill, many argue the incentive is lost for states to rally for congressional action.
"It's easier to block legislation than to pass it," Andy Pincus, a lawyer who filed a brief on behalf of eBay, said during a press conference following the arguments. "The only way the states will come to the table is if they don't get what they want from the Supreme Court and that's exactly what happened in the Microsoft case." On Tuesday, the justices dismissed that case after Congress passed the CLOUD Act following oral arguments in February.
Industry insiders and those involved in the case hold a general consensus that it is unlikely Congress will act before the Supreme Court issues a decision. In fact, Senator Bob Goodlatte (R-VA), chairman of the House Committee on the Judiciary, told reporters following the event that legislation was put on hold after the Supreme Court took up the case.
"This is not a new tax, the states are entitled to the revenue, they should collect it through a use tax but I have a proposal that would allow for business to collect and remit the tax to their own state and then that state transmit it to the state where the consumer is located," he said. "That is a much fairer and simpler solution than others that have been proposed, but we will not get to it unless the [Supreme Court] says this is something that the legislature should resolve not the courts," he said.
Many on the other side, however, vehemently disagree with such a proposal, suggesting that compromise may still be out of sight.
Small businesses could lose either way
Central to both opposing arguments are small businesses. On the one side are e-commerce websites and on the other, traditional mom-and-pop shops. But these days, retailers know the line between the two is blurring as nearly all retailers add online channels for growth.
Kathy Terrill, a small business apparel seller on eBay, Etsy and her own website, is a staunch supporter of Quill. During a press conference following the oral arguments, she said if the precedent is overturned, sales tax could become "weaponized" against small sellers.
"It is arrogant to say how easy it is to comply with online sales tax and then you want me to do it in 46 states and thousands of jurisdictions, and you think you just flip a switch to do that? Good luck because it doesn't happen that way."
Kathy Terrill
Owner of a small apparel e-commerce business
"It is in effect taxation without representation and I was thinking didn't we settle that awhile ago in Boston?" she said. "When I hear people glibly talking about how easy it is to comply with online sales tax — you file online sales tax. I have good software and a good accountant, and it takes time and hours. And that's hours away from inventory sourcing, away from shipping, away from taking care of customer service. It is arrogant to say how easy it is to comply with online sales tax and then you want me to do it in 46 states and thousands of jurisdictions, and you think you just flip a switch to do that? Good luck, because it doesn't happen that way."
To Jackley on the other side, small brick-and-mortar businesses have been losing on price for years. "It's the small business hurt most by Quill because it's those businesses that are getting that unfair playing field so when their products go on the market they're at a disadvantage over those remote sellers," he said during the press conference. "All we're asking [is] for those small businesses to be able to have equal and fair treatment."
It remained unclear to the justices just what the impact could be on small sellers, given the different numbers each side presented. On South Dakota's end, they argue the software is free and implementation could cost as little as $12 on 30 orders a month. But the respondents say the real cost of implementation and maintenance could be $250,000.
For a company like Wayfair, which already collects in 22 states, expanding the reach of their existing software may not be as costly or as burdensome — but for small sellers it's another story.
The justices will take the next several months to deliberate these questions and many more, and a decision is expected in June.
