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It will now be up to the court to decide whether to reverse a legal precedent that dates back to an era before internet sales.
The U.S. Supreme Court heard arguments Tuesday in a case that could determine how much leeway states have in the coming years to collect sales taxes from online retailers.
Justices raised questions about when to abandon legal precedent, the respective roles of the court and Congress in shaping the nation’s laws, and about more pragmatic matters that have to do with taxation.
South Dakota v. Wayfair, Inc. concerns a legal precedent that prevents states from imposing sales taxes on companies that don't have an in-state presence, like a warehouse or employees. The court last affirmed the “physical presence” rule in a 1992 case, Quill Corp. v. North Dakota.
Since then, e-commerce has evolved into a roughly $450 billion-per-year sector, creating pressure to revisit the ruling, particularly among states concerned about lost sales tax revenue.
The Supreme Court is expected to issue an opinion in Wayfair by the end of June.
Notably, Justice Stephen Breyer sounded conflicted over how to best tackle the case.
“When I read your briefs, I thought 'absolutely right,'” he said as South Dakota Attorney General Marty Jackley presented his argument.
“And then I read through the other briefs, and I thought 'absolutely right,'” Breyer added, according to a transcript of the court proceedings. “And you cannot both be absolutely right.”
Breyer noted the two sides’ court filings present “wildly different” estimates for figures like compliance costs and lost tax revenues.
He also questioned how compliance costs affect vendors of different sizes. “What does it cost for a mandolin seller who sells mandolins on the internet to sell them in 50 states?” he asked.
“What does it cost Amazon?” he added later.
Lisa Soronen, executive director of the State and Local Legal Center, a group that assists state and local governments with Supreme Court litigation, said in an email that Breyer’s uncertain position would probably not work in favor of discarding the Quill standard.
This, she explained, elevates the significance of where Chief Justice John Roberts comes down on the case. Roberts asked questions on both sides of the physical presence rule, Soronen pointed out.
Among the issues he raised was whether the issue of uncollected online sales taxes had “peaked.”
U.S. Government Accountability Office estimates indicate states already receive tax on 87 percent to 96 percent of sales by the top 100 online retailers. This is something Wayfair and two other online merchants involved in the legal dispute have highlighted. Meanwhile, a number of states have passed legislation to work around the physical presence standard.
“If it is, in fact, a problem that is diminishing rather than expanding, why doesn't that suggest that there are greater significance to the arguments that we should leave Quill in place?” he asked Jackley, who responded by pointing out that online retail is rapidly growing.
Soronen noted in her email that three of the nine justices—Anthony Kennedy, Neil Gorsuch and Clarence Thomas—have previously signaled possible support for discarding Quill. Justice Ruth Bader Ginsburg appeared to be in the same camp on Tuesday.
Justice Sonia Sotomayor, on the other hand, sounded skeptical about reversing the physical presence rule. “I'm concerned about the many unanswered questions that overturning precedents will create a massive amount of lawsuits about,” she said.
Sotomayor zeroed in at one point on whether states would seek to apply sales tax retroactively to past internet sales transactions if Quill is nixed. The South Dakota law that prompted the Wayfair case specifically says it is not to be applied to past sales.
But Wayfair and the other companies in the case have argued that the risk of retroactive taxation by other states and localities would present a “crippling” liability for companies if the physical presence standard were to be cast aside by the court.
Jackley said in his argument that 38 states have indicated their laws would prevent taxation on past transactions.
“The states don’t want to address this retroactively,” he added.
Justice Samuel Alito characterized South Dakota’s sales tax law as a “test case” that was devised to be reasonable.
“But do you have any doubt that states that are tottering on the edge of insolvency and municipalities which may be in even worse positions have a strong incentive to grab everything they possibly can?” Alito asked U.S. Deputy Solicitor General Malcolm Stewart, who was arguing the government’s position, which is in support of South Dakota.
Stewart conceded states might "adopt regimes that are less hospitable to retailers, unless they were stopped from doing that by Congress."
Wayfair and the other firms contend that Congress, not the Supreme Court, is the best venue for making decisions that could alter the Quill precedent.
Ginsburg didn’t sound convinced. Referring to the Quill decision, she said: “If time has, and changing conditions, have rendered it obsolete, why should the court which created the doctrine say: Well, we'll—we'll let Congress fix up what turns out to be our obsolete precedent?”
Proponents of the court overturning Quill say Congress has failed to act.
“When somebody says something like that, that Congress has not addressed an issue for 25-plus years, you know, it—it gives us reason to pause, because Congress could have addressed the issue and Congress chose not to,” said Justice Elena Kagan.
“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,” she added as Jackley argued South Dakota's side of the case. “That seems to make the—your bar higher to surmount.”
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Bill Lucia is a Senior Reporter for Government Executive's Route Fifty and is based in Washington, D.C.