Supreme Court Hears Case that May Fundamentally Change the Rules – Are You Ready for Potential Sales Tax Turmoil?

by Parker Poe Adams & Bernstein LLP
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Parker Poe Adams & Bernstein LLP

On April 18, 2018 the United States Supreme Court heard oral arguments in South Dakota v. Wayfair – a case that could fundamentally change the rules governing when a state may impose sales or use tax collection responsibilities on a retailer. For over 50 years, decisions from the Supreme Court protected retailers that do not have a “physical presence” in the state from collecting tax on sales made to customers in that state. That may be about to change. If the Supreme Court eliminates the physical presence standard, retailers nationwide may be required to collect tax on their sales to all states. Is your business ready?

History of the Case

The Physical Presence Requirement. Since 1967, retailers have been protected from sales or use tax collection obligations by what is now known as the “physical presence requirement.” This requirement was first applied in National Bellas Hess, where the Supreme Court invalidated an attempt by the State of Illinois to impose use tax on an out-of-state retailer whose only connection with customers in Illinois was by common carrier or by the United States mail. In 1992, the Court reaffirmed the rule announced in National Bellas Hess in Quill v. North Dakota largely on stare decisis grounds. The Court held that, under the Commerce Clause of the United States Constitution, a state may not impose a use tax on a retailer with no physical presence in that state. Importantly, the Court stated it might not have reached the same result were the question before it for the first time.

The “Kill Quill” Movement. In 2015, Justice Kennedy authored a concurring opinion in Direct Marketing v. Brohl in which he called for a reconsideration of Quill. Since then, many states including South Dakota have enacted laws aimed at generating a legal challenge to the physical presence standard of Bellas Hess and Quill. Many brick and mortar retail establishments have joined the call to overrule Quill on the grounds that it creates an unfair commercial advantage.

South Dakota’s Law. In March of 2016, South Dakota enacted a law which requires retailers with no physical presence in the state to collect sales tax if they have $100,000 or more in sales to South Dakota residents or 200 or more deliveries into the state. As expected, it drew an immediate challenge and reached the state’s highest court. The South Dakota Supreme Court held the law was unconstitutional under Quill.

Observations from Oral Argument

  • The first question for South Dakota came from Justice Sotomayor who wanted to know why the states could not simply collect use taxes from consumers. She stated that South Dakota’s position raised a host of questions, including how much contact is enough to trigger a tax obligation. Later, however, Justice Ginsburg observed that it was much more efficient for the states to collect sales tax from sellers rather than use tax from consumers. ​
  • Several of the Justices asked why the Court should not leave the matter to Congress. According to Justice Kagan, the fact that Congress had not acted “for 25 plus years” on this issue gives the Court “reason to pause” and raises the bar for South Dakota to prevail. Later, Justice Kagan added, “Congress . . . can craft a compromise in ways that we cannot.” Justice Sotomayor asked counsel for taxpayers whether there was anything the Court could do to signal to Congress “that it should act more affirmatively in this area.” Chief Justice Roberts countered that perhaps Congress has made a decision, a decision to leave the law the way it has been for 25 years. Justice Ginsburg then remarked that if the Court were responsible for Bellas Hess, why shouldn’t the Court take responsibility, mentioning the strong dissent in Quill and Justice Kennedy’s concurring opinion in Direct Marketing.
  • Questioning counsel for taxpayers, Justice Ginsburg suggested that, rather than resulting in discrimination, a decision overruling Quill would result in equality among sellers. Justice Breyer pressed taxpayer’s counsel on the point, asking why the Court should favor one particular business model over another.

Are You Ready for Wayfair?

  • If the Court eliminates the physical presence standard in Wayfair the biggest questions are:
    • What will be the new standard – if any?
    • Will it be applied uniformly by the states?
    • Will it be applied retroactively?
  • ​If the Court overrules Quill and does not announce a new uniform standard binding on all the states, chaos may ensue. Each one of the states that imposes a sales or use tax could seek to create its own standard, and retailers could be required to comply with a multitude of varying tax regimes. More troublesome, if the Court is silent on the question of retroactivity, some states may seek to impose significant retroactive liabilities.​​​​​ ​
  • A decision is expected by the end of June.​​ ​
  • In anticipation of Wayfair, your business should begin considering:
    • Its level of exposure to state sales or use tax liability if the physical presence standard is eliminated, including retroactive liability
    • Whether existing software and systems are sufficient to begin accurately collecting and accounting for sales or use tax in a post Quill world

Stay tuned for additional information from Parker Poe’s SALT team on additional developments in Wayfair and how it may affect your business.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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