U.S. Supreme justices on Tuesday weighed the constitutional and policy complexities that could result if they ruled to expand online sales tax collections, in a case that has major implications for e-commerce.
Several justices appeared to take seriously the key premise of retailers in the case, namely that Internet competitors with no physical presence in a state should be required to collect sales tax for that state. Under existing case law, they do not.
“Why should this court favor those who don’t over those who do” have a physical presence? Justice Neil Gorsuch asked the representative of retailers trying to maintain the existing legal structure.
Similarly, Justice Ruth Bader Ginsburg asked why it should be considered a unconstitutional burden on remote sellers to subject them to the same tax regime that a state’s retailers face. She asked, “why isn’t that equalizing rather than discriminating?”
The case in question, South Dakota v. Wayfair Inc., could set law governing the collection of taxes on Internet sales around the country.
South Dakota, a state that relies heavily on sales taxes to fund its government, passed a law designed to be a vehicle for the Supreme Court to reconsider the 1992 case Quill Corp. v. North Dakota, which established that states could not require out-of-state businesses to collect sales taxes.
With the rise of Internet retail over the past two-and-a-half decades, the limits on taxation set by Quill have led to controversy. Brick-and-mortar retailers that compete with online sellers have lobbied Congress to allow states to require out-of-state online retailers to collect online sales. Now, they are looking for the high court to rule on the issue. They have support from state governments afraid of seeing their tax bases erode. Shoppers are supposed to pay taxes on online purchases, but rarely do.
On Tuesday, several justices raised the prospect of potential problems that could crop up if they revisited Quill.
Justice Stephen Breyer repeatedly asked whether small online retailers would face major difficulties in complying with the rules of hundreds of jurisdictions around the country, putting them at a disadvantage to giants like Amazon and eBay.
The possibility of a handful of Internet giants crowding out small business worried him, he said, and he asked both sides to provide the court with better evidence regarding the burdens that would result from allowing taxation of remote sales.
“There are empirical questions that I think would help me reach an answer,” he said.
Justice Samuel Alito, too, alluded to the possibility of states moving to “grab anything they possibly can” to expand their tax bases, by taxing even small retailers. The South Dakota law in question would exclude small sellers from taxation. Sonia Sotomayor asked whether all small businesses would face high compliance costs.
A question that arose throughout the arguments was whether the complexity of the tax issues at hand raised the burden for the court to overturn its earlier decision. The choice would be binary for the court, Justice Elena Kagan remarked, while Congress would be able to “craft a compromise” if it wrote legislation relating to online sales.
There was some disagreement in the flow of conversation regarding the fact that Congress hasn’t legislated on the question over the past three decades. Kagan suggested that Congress’ inaction raises the bar for the court to act, on the grounds that it suggests that the situation is not as dire as some say.
Ginsburg, however, said the court should not wait for Congress to fix a problem created by its own prior ruling becoming obsolete.
The retailers arguing for the preservation of Quill Tuesday because the South Dakota law would hurt their business were joined by large e-commerce companies like eBay that oppose a ruling changing existing law. Many conservatives, too, oppose overturning the Quill decision on the grounds that allowing states to collect taxes from businesses in other jurisdictions would be an unconstitutional expansion of their power. It would allow state governments to exercise power over people who cannot hold them accountable through democratic action, according to the conservative argument.
Conservatives took comfort in the parts of Tuesday’s arguments that centered on the chaos that could result if Quill is undone.
“A world without Quill is a free-for-all of cross-border tax raids without limit, cannibalizing interstate commerce and harming consumers and businesses,” said Andrew Moylan, executive vice president of the National Taxpayers Union Foundation.
President Trump, however, has been vociferous in backing online sales taxes, especially in the case of Amazon, a company run by Jeff Bezos, whose ownership of the Washington Post has also irked Trump.
Trump’s solicitor general wrote a brief backing South Dakota in the case, arguing that the Quill precedent failed to account for the growth of e-commerce and that online stores have “virtual” presences in states much the same as actual physical locations. Deputy solicitor general Malcolm Stewart presented the government’s argument Tuesday.
Amazon already collects sales taxes in states where they are located, although it doesn’t do so for third-party sellers on its platform. In the past it has backed legislation to set up a nationwide online sales tax regime.
A significant amount of money is at stake. The Government Accountability Office estimated last year that states would have had an extra $8.5 billion to $13.4 billion in 2017 in their coffers if they’d been allowed to require tax collections on online sales. Yet justices also asked for clarity Tuesday regarding the available estimates of taxes at stake, as well as for details regarding compliance costs.
Eric Citron of Goldstein & Russell, who represented the government of South Dakota in its efforts to overcome Quill, expressed optimism that the court was headed toward a ruling favorable to retailers.
“I think it’s clear there are a lot of votes against Quill,” he said, while acknowledging that “there are other justices who are more concerned about what will happen if they get rid of it because they think they are embarking on the Wild West.”
Chief Justice John Roberts’ line of questioning, Citron added, suggested that he may be interested in a compromise that left South Dakota’s law in place, while not necessarily opening the door to other states imposing tax regimes more punitive of small internet retailers.
Senators Heidi Heitkamp, D-N.D., Lamar Alexander, R-Tenn., and Mike Enzi, R-Wyo., attended Tuesday’s arguments, as did House Judiciary Committee Chairman Bob Goodlatte of Virginia.
