Taxation without Representation: U.S. Supreme Court Hears Oral Arguments in South Dakota v. Wayfair

This is a follow-up to our recent post regarding the pending Supreme Court case South Dakota v. Wayfair and the future of requisite sales tax “substantial” nexus for remote sellers. On Tuesday, the Supreme Court heard oral arguments which seemed to contradict the narrative that the Supreme Court is set to overturn the longstanding physical presence test in Quill Corp. v. North Dakota.

Overall, the Supreme Court Justices, who were well-versed on the issues of the case, expressed concern about the consequences of taking a case based on the dormant commerce clause, a constitutional concept that prohibits states from placing substantial burdens on interstate commerce. The issue is whether the Commerce Clause prohibits South Dakota from requiring remote sellers to collect and remit use tax if they lack physical presence in the state.

Policy arguments drove the debate. Justice Sotmayor grilled South Dakota Attorney General regarding the adverse impact on small businesses if Quill is overturned, citing the high costs of collection software integration and being subject to audits by many additional states. Additional uncertainty was discussed concerning minimum threshold for collection and possible retroactive application of the new ruling. Although South Dakota contends that states would not seek to impose sales tax retroactively, nothing prevents a cash-strapped state from imposing sales tax for periods prior to the ruling in Wayfair – and Connecticut is already attempting to apply its law retroactively. If the Court were to overrule Quill, we expect the ruling to explicitly prohibit retroactive application of sales tax to remote sellers, as failing to do so would be fundamentally unfair and result in a disastrous situation for remote sellers.

Chief Justice Roberts even questioned the necessity of overturning Quill, asserting that many large e-commerce retailers are already collecting sales taxes in most or all states, and some states have found work-arounds to collect even more (e.g., click-through nexus, sales tax notification and reporting laws, etc.). Further, the Chief Justice suggested that Congress’ failure to act on the Quill ruling for the last 26 years may be indicative of its decision to leave this area unchanged.

The ever changing landscape of multistate sales tax collection was recently discussed by Rich Fry in our latest TaxTalk video.

Although counsel for both sides seemed confident in a favorable ruling, the outcome of this case remains unclear. Our team is committed to staying on top of these developments. If you have questions or concerns regarding multistate sales tax nexus or how these developments affect your business, please contact a member of our SALT team.