Justice should keep use tax precedent

OCTOBER 2017 TERM

On April 17, the U.S. Supreme Court heard oral arguments in South Dakota v. Wayfair. That case reached the court on appeal from a 2016 South Dakota bill that would require any seller of taxable goods or services to South Dakota customers to collect and remit use tax due on those sales if the seller met a threshold of either $100,000 in annual sales or 200 annual transactions to South Dakota. Those new "economic nexus" thresholds were imposed in an intentional and direct challenge to the existing physical presence threshold that the Supreme Court affirmed in its 1992 decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992) [opinion attached below].

During oral argument, the justices raised questions and debated whether to reverse Quill and to uphold South Dakota's new economic nexus thresholds. For numerous reasons, the court should affirm the physical presence rule of Quill and allow Congress to decide what new standard -- if any -- should govern use tax collection by remote sellers.

High Burdens on Small Sellers

South Dakota's low economic nexus thresholds impose substantial new burdens on sellers that are not commensurate with the benefits to states, taxpayers and the small businesses they are alleged to help.

A small seller of goods to South Dakota making sales that average $15 per transaction would be required to collect and remit tax to South Dakota on only $3,000 of sales into the state per year. Contrast this low threshold with the thousands of dollars of costs that a seller can expect to incur to install compliance software, integrate it with other systems, train employees, and update and maintain the software, and the compliance burdens can quickly overwhelm the benefits of the business expansion for a small or mid-size seller.

South Dakota has attempted to downplay these burdens, contending that a seller can pay a provider to file a return and remit tax to South Dakota for less than $20 per month, but this assertion ignores the numerous indirect costs of compliance that are just as real as the direct costs cited by South Dakota.

This example adds context to the justices' obvious frustration with the lack of a record in the case and the wildly divergent claims in the briefs regarding the costs and benefits of replacing the physical presence rule with an economic threshold. Justice Stephen Breyer in particular voiced this concern, stating that "you [each] have wildly different estimates of costs, revenues, and what states are losing or not." South Dakota has asserted that its law is intended to help put small sellers on equal footing with the big fish, but it has offered virtually no evidence in support of this claim.

In many ways, the Supreme Court's difficulty in understanding the true costs and benefits of replacing the physical presence rule in 2018 reinforces the wisdom of the court's 1992 ruling in Quill, in which the court noted that its decision was "made easier by the fact that the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve."

As the oral argument demonstrated, it is not at all clear whether the South Dakota law offers any improvement to the status quo in balancing the interests of the states, businesses and affected individuals; accordingly, as the court concluded in 1992, Congress -- rather than the South Dakota legislature -- is the appropriate and best party to evaluate and impose a new nexus standard, if any.

Retroactive Assessments and Incomplete Resolution

In addition to the prospective burdens that taxpayers would face if the Supreme Court were to reverse Quill, sellers could face an additional burden: a real risk of retroactive tax assessments. Although South Dakota explicitly promised not to collect taxes for periods before the enactment of its new law, other states have not and cannot promise to do so. Indeed, when Justice Samuel Alito raised the concern that some states would "have a strong incentive to grab everything they possibly can," the attorney for the United States conceded that he had "no doubt" that "many states would adopt regimes that are less hospitable to retailers unless they were stopped from doing that by Congress."

The government attorneys also undermined the specific threshold that the South Dakota Legislature had crafted for the court's consideration, as the attorneys for both the United States and South Dakota conceded that a threshold of a single sale into a state could be constitutionally sufficient.

Given the threat of retroactive application of a ruling for South Dakota, along with the uncertainty raised by a number of justices about the extent to which various affected parties would be helped or harmed by its ruling, the fact that a ruling for South Dakota would not even resolve the issue of the new minimum threshold further vitiates against a change to the status quo.

Dangerous Precedent

Congress' ability to set a new rule to replace the physical presence standard was itself an important reason cited by the majority in Quill. It would therefore be a giant step in the opposite direction for the Supreme Court to reverse Quill and, in the process, usurp the undeniably legislative responsibility of deciding the new thresholds for the imposition of use tax collection obligations.

States have made clear that they believe the time for Congress to have enacted a new law to replace the physical presence standard is long overdue. But as Justice Elena Kagan noted during oral argument, the fact that Congress has considered numerous bills in the area but has not yet enacted a new standard should give the court "pause" because "Congress has been aware of [the issue] for a very long time and has chosen not to do something about" it. It would make little sense for the court to reset the terms of that debate now, when already explained in Quill -- in fairly grand fashion -- that the matter can and should be resolved by Congress.

Furthermore, a ruling in South Dakota's favor would create a dangerous precedent, for South Dakota's blueprint for reversing a Supreme Court ruling (i.e., passing a plainly unconstitutional law with a fast-track-appeal mechanism) would embolden numerous other actors to try the same stunt with more politically charged legal disputes. Unfortunately, it takes little imagination to think of numerous efforts that could quickly yield dangerous standoffs in state capitals and state courts across the country (e.g., an aggressive gun-restriction law to try to force a new review of the scope of the Second Amendment).

To reward South Dakota by reversing Quill under these circumstances would encourage and embolden other states to pass unconstitutional laws to force the issue of reconsideration of numerous other issues, potentially causing cracks in the rule of law and constant efforts to force reconsideration of constitutional cases.