Supreme Court to Decide Billon Dollar Sales Tax Case

​By Lisa Soronen, executive director of the State and Local Legal Center

In November 2017, a Government Accountability Office report estimated that states and local governments could "gain from about $8 billion to about $13 billion in 2017 if states were given authority to require sales tax collection from all remote sellers."

In January 2018 the Supreme Court agreed to decide South Dakota v. Wayfair. In this case South Dakota is asking the Supreme Court to rule that states and local governments may require retailers with no in-state physical presence to collect sales tax.

This case is huge news for states and local governments. This article describes how we got here and why it is likely South Dakota will win.

In 1967 in National Bellas Hess v. Department of Revenue of Illinois, the Supreme Court held that per its Commerce Clause jurisprudence, states and local governments cannot require businesses to collect sales tax unless the business has a physical presence in the state.

Twenty-five years later in Quill v. North Dakota (1992), the Supreme Court reaffirmed the physical presence requirement but admitted that "contemporary Commerce Clause jurisprudence might not dictate the same result" as the Court had reached in Bellas Hess.

Customers buying from remote sellers still owe sale tax, but they rarely pay it when the remote seller does not collect it. Congress has the authority to overrule Bellas Hess and Quill but has thus far not done so.

To improve sales tax collection, in 2010 Colorado began requiring remote sellers to inform Colorado purchasers annually of their purchases and send the same information to the Colorado Department of Revenue. The Direct Marketing Association sued Colorado in federal court claiming that the notice and reporting requirements were unconstitutional under Quill. The issue the Supreme Court decided in Direct Marketing Association v. Brohl (2014), was whether the Tax Injunction Act barred a federal court from deciding this case. The Supreme Court held it did not.

The State and Local Legal Center filed an amicus brief in Direct Marketing Association v. Brohl describing the devastating economic impact of Quill on states and local governments. Justice Kennedy wrote a concurring opinion stating that the "legal system should find an appropriate case for this Court to reexamine Quill." Justice Kennedy criticized Quill for many of the same reasons the SLLC stated in its amicus brief. Specifically, internet sales have risen astronomically since 1992, and states and local governments have been unable to collect most taxes due on sales from out-of-state vendors.

Following the Kennedy opinion, a number of state legislatures passed laws requiring remote vendors to collect sales tax in clear violation of Quill. South Dakota's law was the first ready for Supreme Court review.

In September 2017, South Dakota's highest state court ruled that the South Dakota law is unconstitutional because it clearly violates Quill and it is up to the U.S. Supreme Court to overrule Quill. In October 2017, South Dakota filed a certiorari petition asking the Supreme Court to hear its case and overrule Quill. The SLLC filed an amicus brief supporting South Dakota's petition. The Supreme Court ultimately agreed to decide the case.

It seems likely the Supreme Court will rule in favor of South Dakota and overturn Quill for a number of reasons. It is unlikely the Supreme Court accepted this case to congratulate the South Dakota Supreme Court on correctly ruling that South Dakota's law is unconstitutional. Said another way, if the Supreme Court wanted to leave the Quill rule in place it probably would have simply refused to hear South Dakota v. Wayfair.

It is easy to count at least three votes in favor of South Dakota in this case. First, Justice Kennedy of course. Second, Justice Thomas. While he voted against North Dakota in Quill, he has since entirely rejected the concept of the dormant Commerce Clause, on which the Quill decisions rests. Third, Justice Gorsuch. The Tenth Circuit ultimately decided Direct Marketing Association v. Brohl ruling that Colorado's notice and reporting law didn't violate Quill. Then-judge Gorsuch wrote a concurring opinion strongly implying that given the opportunity the Supreme Court should overrule Quill.

That said, the Supreme Court, and the Roberts Court in particular, is generally reticent about overturning precedent. The Quill decision illustrates as much. The Supreme Court looks at five factors in determining whether to overrule a case. One factor is whether a rule has proven "unworkable" and/or "outdated ... after being 'tested by experience.'" This factor weighs strongly in favor of overturning Quill. As Justice Kennedy pointed out in Direct Marketing Association v. Brohl: "When the Court decided Quill, mail order sales in the United States totaled $180 billion. But in 1992, the internet was in its infancy. By 2008, e-commerce sales alone totaled $3.16 trillion per year in the United States." The Court will hear this case and issue an opinion by the end of June 2018.

The SLLC files amicus curiae briefs in support of states and local governments in the U.S. Supreme Court.

S.C. revenue may hinge on court opinion

South Carolina has been missing out.

If state and local governments had been allowed to require all remote sellers — companies located outside the state — to collect taxes on all remote sales last year, South Carolina could have seen between $132 million and $193 million in revenue, according to the Government Accountability Office.

A GAO report released in November of 2017 also found that nearly half of those potential revenue gains to state and local governments would have resulted from collecting sales taxes on all e-marketplace sales, transactions on sites such as eBay, Etsy and Amazon Marketplace. The current dynamic also works against local brick-and-mortar businesses that lose out on sales when customers visit to try on or try out a product only to go home and purchase the item online state-tax free.