Supreme Court hears oral arguments in sales tax nexus case

By Eileen Reichenberg Sherr, CPA, CGMA

The Supreme Court heard oral arguments in a case with broad remote sales tax collection ramifications on Tuesday. In the case of South Dakota v. Wayfair, Inc., No. 17-494, the Court is being asked to overturn its decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), and allow states to assert nexus for sales and use tax purposes without requiring the seller’s physical presence in the state.

Quill was decided 26 years ago, but e-commerce has changed the landscape, prompting South Dakota to pursue this case. The case involves a South Dakota law enacted in 2016, S.B. 106, which provides that any business with annual sales of more than $100,000 or 200 separate transactions in South Dakota must collect and remit South Dakota sales tax. During oral arguments, Justice Samuel Alito described the South Dakota law as a “test case” that was “devised to present the most reasonable incarnation of this scheme” (transcript p. 27).

The justices seemed quite engaged in the issue but mostly hinted that Congress may be best equipped to deal with it if anything needs to be done. Several justices seemed concerned with the burdens on small businesses and the appropriate minimum threshold for collection as well as the consequences for potential retroactivity if Quill is repealed. The case will be decided by the end of June.

More burdens, costs if overturned, and retroactive application

The Supreme Court justices asked many questions at the oral arguments. Justice Sonia Sotomayor started the questioning, saying that Quill was not the issue, but the issue was more that the states have not yet figured out a way to collect the tax. She was concerned that overturning Quill will cause more lawsuits and the potential for retroactive application, and noted that it has been asserted that several states have already started retroactive collection. South Dakota’s attorney general, Marty Jackley, who was representing the state, responded that the states do not want to change the rules retroactively and 38 states have laws that prevent retroactivity. Justice Ruth Bader Ginsburg opined that Congress could address retroactivity if Quill were overturned.

Sotomayor was concerned that if Quill were overturned after 30 years, there would be additional difficulties, such as the costs on small businesses (noting that one of the briefs cited a $250,000 price tag to implement sales tax software), costs for audits, costs to integrate the program with existing programs, costs to maintain it, difficulties and chaos in the interim period, and issues when the software does not function correctly and merchants are not able to keep track of the buyers.

She noted that five states do not centralize administration of state and local sales taxes. She asked how much contact or how many sales are enough to create an obligation of an out-of-state seller, to which South Dakota’s counsel and the U.S. deputy solicitor general, Malcolm Stewart, responded that just one sale into the state was enough to create an obligation.

Problems decreasing already

Chief Justice John Roberts also questioned whether there would be a constitutional minimum regarding whether out-of-state small businesses would be protected from the obligation and burdens of sales tax collection, to which Jackley responded that the balancing test articulated in Pike v. Bruce Church, Inc., 397 U.S. 137 (1970), would provide the protection. Roberts also seemed concerned with the suggested minimum of one warehouse and one sale to create nexus. He noted that the economic impact of sales tax noncollection by remote sellers may have peaked and be getting better as the bigger e-commerce companies now have a physical presence in all 50 states and so are collecting sales tax in all 50 states. He also suggested that the states have found workarounds, so the Court may not need to act.

Another issue that was raised was the burdens of the South Dakota scheme of requiring collection and remittance versus the Colorado scheme of notice and reporting. (Colorado Rev. Stat. §39-21-112.3.5 requires retailers selling to Colorado customers that do not collect sales tax on the sales to send notices and purchase summaries to customers and file an annual customer information report with the Colorado Department of Revenue.) Alito said if Quill is upheld, internet retailers will have to deal with Colorado-type statutes and aggressive moves by the states.

Congressional action

Alito suggested that congressional action could resolve the issues versus the Court overturning Quill, which would raise issues of retroactive liability and minimum number of sales in the state. He said that if Quill is overturned, states will no longer have an incentive to ask for federal legislation to solve the problem. Jackley responded that the Court needs to act because Congress has not acted in 26 years. Justice Elena Kagan expressed concern that the Court may not want to act if Congress has the issue on its radar. She said it is clear that the issue has been considered and Congress could have, and has not, acted in 26 years: “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. And that seems to make your bar higher to surmount” (transcript p. 11).

Justice Stephen Breyer pointed out that with a dormant Commerce Clause case, Congress can overturn the Court’s decisions, and the reason the Court is more willing to overturn prior cases involving a constitutional issue is because Congress cannot act. He thinks that here Congress can act, and that the 50 states have a lot of power to make Congress act. He noted that three senators and a congressman provided briefs saying that they intended to act but did not because the Court had agreed to hear the Wayfair case.

Ginsburg and Kagan both asked whether creating a minimum threshold isn’t the type of thing that Congress is best equipped to handle. Kagan noted that the Court could just say there is or is not a Quill rule, but Congress could craft compromises to balance all the interests.

If the Supreme Court does not overturn Quill, the issue will likely go back to Congress to possibly act on the issue. If Quill is overturned, the states will likely not seek congressional action.

Eileen Reichenberg Sherr ( is an AICPA senior manager of Tax Policy & Advocacy.

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