For the past decade, states have been battling with online retailers in state legislatures, the courts and in Congress over when a state may require an online retailer to collect sales tax. At the center of the debate was the Supreme Court’s decision in Quill Corp. v. North Dakota, 504 U. S. 298, 311 (1992) which affirmed a bright line rule that retailers need not collect sales tax in states in which they do not have a physical presence.
States sought to extend the reach of their taxing authority by adopting what became known as “Amazon-tax” laws in which retailers with generating more than a certain level of sales due to in-state online affiliates were deemed to be conducting business in that state. Other states, such as Colorado, imposed certain disclosure and reporting requirements, online retailers.
Kennedy Opens The Door on Quill
The Supreme Court declined to consider challenges to the Amazon-tax laws and when it considered the Colorado statute it was on technical grounds having nothing to do with the Quill decision. Direct Mktg. Ass’n v. Brohl, 135 S.Ct. 1124 (2015). Justice Kennedy, however, in his concurrence in that case that questioned the continued vitality of Quill.
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. App. 28.
Because of Quill . . . States have been unable to collect many of the taxes due on these purchases. California, for example, has estimated that it is able to collect only about 4% of the use taxes due on sales from out-of-state vendors. . . . The result has been a startling revenue shortfall in many States, with concomitant unfairness to local retailers and their customers who do pay taxes at the register. . . . States’ education systems, healthcare services, and infrastructure are weakened as a result.
Then Kennedy stated that having a presence that is a mere click away may constitute having a presence regardless of where the retailer may be physically located.
The Internet has caused far-reaching systemic and structural changes in the economy, and, indeed, in many other societal dimensions. Although online businesses may not have a physical presence in some States, the Web has, in many ways, brought the average American closer to most major retailers. A connection to a shopper’s favorite store is a click away—regardless of how close or far the nearest storefront. . . . Today buyers have almost instant access to most retailers via cell phones, tablets, and laptops. As a result, a business may be present in a State in a meaningful way without that presence being physical in the traditional sense of the term.
Based on these considerations, Kennedy concludes it is time to reevaluate Quill.
Given these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court’s holding in Quill. . . . The legal system should find an appropriate case for this Court to reexamine Quill.
South Dakota Makes the Case
In South Dakota v. Wayfair, Inc., the state has taken up Justice Kennedy’s challenge and is calling for the Supreme Court to reverse Quill. South Dakota passed legislation requiring tax collection if there was at least $100,000 in sales or 200 separate transactions in the state, but the lower courts invalidated the law as being preempted by Quill.
South Dakota argued for the Supreme Court to hear the case, asserting that:
- the revenue that Quill withholds amounts to billions that state and local governments can ill-afford to lose when it comes to paying for “education systems, healthcare services, and infrastructure”;
- Quill tilts the economic playing-field against brick and mortar retailers —including many small, local businesses—draining the local economy and upsetting the fair, competitive dynamic that makes the free market work; and
- Quill harms interstate commerce by irrationally preferring one form of business organization over another makes the market inefficient: As several economists have explained, it means that there will be too much online commerce and too few brick-and-mortar stores.
Last week, the Supreme Court agreed to hear South Dakota’s appeal. Its petition for cert is below.