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The U.S. Supreme Court heard arguments Tuesday in a case that could determine how much leeway states have in the coming years to collect sales taxes from online retailers. This can be a big swing of tax benefits to states and affect local government taxing authority as well. The Justices raised questions about when to abandon legal precedent, the respective roles of the court and Congress in shaping the nation’s laws, and about more pragmatic matters that have to do with taxation. South Dakota v. Wayfair, Inc. concerns a legal precedent that prevents states from imposing sales taxes on companies that don't have an in-state presence, like a warehouse or employees. The court last affirmed the “physical presence” rule in a 1992 case, Quill Corp. v. North Dakota. Twenty plus years ago when I worked for a member of Congress who represented the heart of Silicon Valley, the Tech sector said time and again the fledging Internet industry was considered too young to tax and by taxing internet sales it could kill the goose that laid the golden egg. Congress enacted and President Clinton signed into law, The Internet Tax Freedom Act (ITFA; P.L. 105-277), enacted in 1998, implementing a three-year moratorium preventing state and local governments from taxing Internet access, or imposing multiple or discriminatory taxes on electronic commerce. Under the moratorium, state and local governments cannot impose their sales tax on the monthly payments that consumers make to their Internet service provider in exchange for access to the Internet. In addition to the moratorium, a grandfather clause was included in ITFA that allowed states which had already imposed and collected a tax on Internet access before October 1, 1998, to continue implementing those taxes. You can read a more detailed brief on the law here. The original three-year moratorium had been extended eight times before being converted to a permanent statute. As the original moratorium was extended, changes were made to the definition of Internet access to include and exclude different services and technology. Notable changes include the inclusion of digital subscriber lines under the moratorium and the exclusion of Voice over Internet Protocol services from the moratorium. Since then, e-commerce has evolved into a roughly $450 billion-per-year sector, creating pressure to revisit the ruling, particularly among states concerned about lost sales tax revenue. Why is this court case so important to Santa Cruz, California or other cities and states that are grappling with revenue short falls? If the Supreme Court overturns the Quill case, it may be open season on a new revenue source to local and state government. The Supreme Court is expected to issue an opinion in Wayfair by the end of June. Notably, Justice Stephen Breyer sounded conflicted over how to best tackle the case. “When I read your briefs, I thought 'absolutely right,'” he said as South Dakota Attorney General Marty Jackleg presented his argument. “And then I read through the other briefs, and I thought 'absolutely right,'” Breyer added, according to a transcript of the court proceedings. “And you cannot both be absolutely right.” Breyer noted the two sides’ court filings present “wildly different” estimates for figures like compliance costs and lost tax revenues. He also questioned how compliance costs affect vendors of different sizes. “What does it cost for a mandolin seller who sells mandolins on the internet to sell them in 50 states?” he asked. “What does it cost Amazon?” he added later. Lisa Soronen, executive director of the State and Local Legal Center, a group that assists state and local governments with Supreme Court litigation, said that Justice Breyer’s uncertain position would probably not work in favor of discarding the Quill standard. This elevates the significance of where Chief Justice John Roberts comes down on the case. Roberts asked questions on both sides of the physical presence rule. Among the issues he raised was whether the issue of uncollected online sales taxes had “peaked.” U.S. Government Accountability Office estimates indicate states already receive tax on 87 percent to 96 percent of sales by the top 100 online retailers. This is something Wayfair and two other online merchants involved in the legal dispute have highlighted. Meanwhile, a number of states have passed legislation to work around the physical presence standard. “If it is, in fact, a problem that is diminishing rather than expanding, why doesn't that suggest that there are greater significance to the arguments that we should leave Quill in place?” Breyer asked Jackley, who responded by pointing out that online retail is rapidly growing. It is noted that three of the nine justices—Anthony Kennedy, Neil Gorsuch and Clarence Thomas—have previously signaled possible support for discarding Quill. Justice Ruth Bader Ginsburg appeared to be in the same camp on Tuesday. Justice Sonia Sotomayor, on the other hand, sounded skeptical about reversing the physical presence rule. “I'm concerned about the many unanswered questions that overturning precedents will create a massive amount of lawsuits about,” she said. Sotomayor zeroed in at one point on whether states would seek to apply sales tax retroactively to past internet sales transactions if Quill is nixed. The South Dakota law that prompted the Wayfair case specifically says it is not to be applied to past sales. But Wayfair and the other companies in the case have argued that the risk of retroactive taxation by other states and localities would present a “crippling” liability for companies if the physical presence standard were to be cast aside by the court. Justice Samuel Alito characterized South Dakota’s sales tax law as a “test case” that was devised to be reasonable. “But do you have any doubt that states that are tottering on the edge of insolvency and municipalities which may be in even worse positions have a strong incentive to grab everything they possibly can?” Alito asked, U.S. Deputy Solicitor General Malcolm Stewart, who was arguing the government’s position, which is in support of South Dakota. Stewart conceded states might "adopt regimes that are less hospitable to retailers, unless they were stopped from doing that by Congress.” So is it up to Congress, not the Supreme Court, as the best venue for making decisions that could alter the Quill precedent? Ginsburg didn’t sound convinced. Referring to the Quill decision, she said: “If time has changed conditions, have rendered it obsolete, why should the court which created the doctrine say: Well, we'll let Congress fix up what turns out to be our obsolete precedent?” Proponents of the court overturning Quill say Congress has failed to act. “When somebody says something like that, that Congress has not addressed an issue for 25-plus years — it gives us reason to pause, because Congress could have addressed the issue and Congress chose not to,” said Justice Elena Kagan. Keep your eyes on the Supreme Court for a June decision. It is highly unlikely that Congress with its current deficiencies in modeling consensus legislative policy will act if the Supreme Court doesn’t.
The U.S. Supreme Court heard arguments Tuesday in a case that could determine how much leeway states have in the coming years to collect sales taxes from online retailers. This can be a big swing of tax benefits to states and affect local government taxing authority as well.
The Justices raised questions about when to abandon legal precedent, the respective roles of the court and Congress in shaping the nation’s laws, and about more pragmatic matters that have to do with taxation.
South Dakota v. Wayfair, Inc. concerns a legal precedent that prevents states from imposing sales taxes on companies that don't have an in-state presence, like a warehouse or employees. The court last affirmed the “physical presence” rule in a 1992 case, Quill Corp. v. North Dakota.
Twenty plus years ago when I worked for a member of Congress who represented the heart of Silicon Valley, the Tech sector said time and again the fledging Internet industry was considered too young to tax and by taxing internet sales it could kill the goose that laid the golden egg.
Congress enacted and President Clinton signed into law, The Internet Tax Freedom Act (ITFA; P.L. 105-277), enacted in 1998, implementing a three-year moratorium preventing state and local governments from taxing Internet access, or imposing multiple or discriminatory taxes on electronic commerce. Under the moratorium, state and local governments cannot impose their sales tax on the monthly payments that consumers make to their Internet service provider in exchange for access to the Internet. In addition to the moratorium, a grandfather clause was included in ITFA that allowed states which had already imposed and collected a tax on Internet access before October 1, 1998, to continue implementing those taxes.
You can read a more detailed brief on the law here.
The original three-year moratorium had been extended eight times before being converted to a permanent statute. As the original moratorium was extended, changes were made to the definition of Internet access to include and exclude different services and technology. Notable changes include the inclusion of digital subscriber lines under the moratorium and the exclusion of Voice over Internet Protocol services from the moratorium.
Since then, e-commerce has evolved into a roughly $450 billion-per-year sector, creating pressure to revisit the ruling, particularly among states concerned about lost sales tax revenue.
Why is this court case so important to Santa Cruz, California or other cities and states that are grappling with revenue short falls? If the Supreme Court overturns the Quill case, it may be open season on a new revenue source to local and state government.
The Supreme Court is expected to issue an opinion in Wayfair by the end of June. Notably, Justice Stephen Breyer sounded conflicted over how to best tackle the case.
“When I read your briefs, I thought 'absolutely right,'” he said as South Dakota Attorney General Marty Jackleg presented his argument. “And then I read through the other briefs, and I thought 'absolutely right,'” Breyer added, according to a transcript of the court proceedings. “And you cannot both be absolutely right.”
Breyer noted the two sides’ court filings present “wildly different” estimates for figures like compliance costs and lost tax revenues. He also questioned how compliance costs affect vendors of different sizes. “What does it cost for a mandolin seller who sells mandolins on the internet to sell them in 50 states?” he asked. “What does it cost Amazon?” he added later.
Lisa Soronen, executive director of the State and Local Legal Center, a group that assists state and local governments with Supreme Court litigation, said that Justice Breyer’s uncertain position would probably not work in favor of discarding the Quill standard.
This elevates the significance of where Chief Justice John Roberts comes down on the case. Roberts asked questions on both sides of the physical presence rule. Among the issues he raised was whether the issue of uncollected online sales taxes had “peaked.”
U.S. Government Accountability Office estimates indicate states already receive tax on 87 percent to 96 percent of sales by the top 100 online retailers. This is something Wayfair and two other online merchants involved in the legal dispute have highlighted. Meanwhile, a number of states have passed legislation to work around the physical presence standard.
“If it is, in fact, a problem that is diminishing rather than expanding, why doesn't that suggest that there are greater significance to the arguments that we should leave Quill in place?” Breyer asked Jackley, who responded by pointing out that online retail is rapidly growing.
It is noted that three of the nine justices—Anthony Kennedy, Neil Gorsuch and Clarence Thomas—have previously signaled possible support for discarding Quill. Justice Ruth Bader Ginsburg appeared to be in the same camp on Tuesday. Justice Sonia Sotomayor, on the other hand, sounded skeptical about reversing the physical presence rule. “I'm concerned about the many unanswered questions that overturning precedents will create a massive amount of lawsuits about,” she said.
Sotomayor zeroed in at one point on whether states would seek to apply sales tax retroactively to past internet sales transactions if Quill is nixed. The South Dakota law that prompted the Wayfair case specifically says it is not to be applied to past sales. But Wayfair and the other companies in the case have argued that the risk of retroactive taxation by other states and localities would present a “crippling” liability for companies if the physical presence standard were to be cast aside by the court.
Justice Samuel Alito characterized South Dakota’s sales tax law as a “test case” that was devised to be reasonable. “But do you have any doubt that states that are tottering on the edge of insolvency and municipalities which may be in even worse positions have a strong incentive to grab everything they possibly can?” Alito asked, U.S. Deputy Solicitor General Malcolm Stewart, who was arguing the government’s position, which is in support of South Dakota. Stewart conceded states might "adopt regimes that are less hospitable to retailers, unless they were stopped from doing that by Congress.”
So is it up to Congress, not the Supreme Court, as the best venue for making decisions that could alter the Quill precedent?
Ginsburg didn’t sound convinced. Referring to the Quill decision, she said: “If time has changed conditions, have rendered it obsolete, why should the court which created the doctrine say: Well, we'll let Congress fix up what turns out to be our obsolete precedent?” Proponents of the court overturning Quill say Congress has failed to act.
“When somebody says something like that, that Congress has not addressed an issue for 25-plus years — it gives us reason to pause, because Congress could have addressed the issue and Congress chose not to,” said Justice Elena Kagan.
Keep your eyes on the Supreme Court for a June decision. It is highly unlikely that Congress with its current deficiencies in modeling consensus legislative policy will act if the Supreme Court doesn’t.