Supreme Court Overrules Quill

June 21, 2018 by  
Filed under State Tax, Supreme Court, Wayfair

The Supreme Court this morning decided South Dakota v. Wayfair and overruled the longstanding “physical-presence rule” for sales tax collection by out-of-state sellers.  See our previous coverage here.  The vote was 5-4.  The dissenters (Chief Justice Roberts and Justices Kagan, Sotomayor, and Breyer) agreed that the cases establishing the rule were wrongly decided, but took the position that the Court should allow Congress to change the rule.  At oral argument, Justice Alito had indicated that he might share that view, but in the end he voted with the Justices that wanted to put an immediate end to the physical-presence rule.

More analysis of the decision at a future date.

Wayfair – Supreme Court opinion

Oral Argument in Wayfair Raises the Possibility That a Sharply Divided Court Will Preserve Quill

April 18, 2018 by  
Filed under State Tax, Supreme Court, Wayfair

As noted in our initial report on the Wayfair case, supporters of overruling the physical-presence rule of Quill appeared to begin the vote-counting with a solid head start, given statements already made by several of the Justices. Both Justices Kennedy and Gorsuch were on record as questioning the continuing vitality of Quill, and Justice Thomas has repeatedly expressed his general disdain for the Dormant Commerce Clause and seems most unlikely to provide a decisive vote in favor of a controversial application of that doctrine.

The oral argument yesterday in Wayfair provided no reason to change the expectation that these three Justices will vote to overrule Quill. Justice Thomas, in accordance with his standard practice, said nothing at the oral argument. Justice Gorsuch’s questions were all sympathetic to South Dakota. He asked why it was appropriate to draw a distinction that disfavored brick-and-mortar stores and also questioned the retailers’ claim of burdensome tax collection requirements by suggesting that the Colorado notice-and-reporting scheme upheld in Direct Marketing Ass’n v. Brohl, 814 F.3d 1129 (10th Cir. 2016), appears to be even more burdensome. Justice Kennedy described Quill as wrongly decided and criticized some of the other Justices for their apparent willingness to treat the correctness of Quill as irrelevant in deciding how to move forward.

Justice Ginsburg’s questions strongly indicated that she is prepared to supply a fourth vote to overrule Quill. She interjected several times to suggest that solutions would emerge for the problems that were concerning other Justices—namely, Congress could provide a cure for the potential unfairness of imposing a collection requirement on very small sellers and of retroactive application of a new decision overruling Quill; entrepreneurs could be expected to develop software to minimize the burdens of collection. She described the South Dakota statute as one that is equalizing sellers, not discriminating among them, and also pointed out that small local businesses are suffering under the current law. She also remarked that the Court should overturn its own obsolete precedents, not leave the job to Congress. Interestingly, Justice Ginsburg asked counsel for the United States whether the Court could give prospective effect to a ruling overruling Quill. He did not encourage that approach, however, responding that, at least in this context, a prospective decision would be “inconsistent with the judicial role.”

Four votes, however, do not make a majority, and none of the other Justices revealed a strong inclination to join in voting to overrule Quill. In particular, Justices Sotomayor and Alito seemed opposed to changing the law. Justice Sotomayor began the questioning by pointing to “a whole new set of difficulties” that would be created if Quill were overruled, such as possible retroactivity and a “massive amount of lawsuits” about what minimum level of contact would be necessary to obligate a seller to collect sales taxes. Even if Congress were to act to ameliorate these problems, she noted that there would be an “interim period” in which there would be significant “dislocations and lawsuits.”

Justice Alito emphasized that the competing considerations in play cried out for a resolution by Congress that could balance those considerations and reach a more nuanced outcome than the Court could reach. He added that a win for South Dakota in this case would remove the incentive for states to urge Congressional action and hence might reduce the likelihood of Congress stepping in. In response to the argument that this particular statute did not present concerns about retroactivity or burdening very small sellers, Justice Alito stated that the South Dakota law “is obviously a test case,” but the Court needed to be concerned about how a new rule would apply to laws passed by “states that are tottering on the edge of insolvency” that “have a strong incentive to grab everything they possibly can.”

Justices Kagan and Breyer also seemed fairly sympathetic to retaining Quill. Making more of an economic than a constitutional point, Justice Breyer expressed strong concern about the entry costs for small e-commerce businesses, remarking that overruling Quill would undermine the “hope of preventing oligopoly.” On this point, as well as on the economic issues focused upon by the briefs, Justice Breyer expressed frustration that the Court was in no position to resolve the parties’ conflicting empirical claims. In a similar vein, he noted that the issue in the case was like a statutory issue on which the Court would ordinarily allow Congress to act, rather than overruling its own decision, and he cited the brief filed by three Senators and Congressman Goodlatte that argued that Congress will take action if the Court leaves things alone.

Justice Kagan, who is generally a champion of stare decisis, suggested that instead of treating Congressional inaction as a reason for the Court to step in, the Court should “pay attention” to the fact that Congress has chosen not to overturn Quill. She also observed that, if South Dakota prevailed, small sellers would probably look for help to companies like Amazon, which could take over compliance for small companies on their system. Creating this new business opportunity for the major online retailers would be “ironic” – “saying the problem with Quill is that it benefited all these companies, so now we’re going to overturn Quill so that we can benefit the exact same companies.”

Chief Justice Roberts questioned both sides, but not at length. He pressed both South Dakota’s counsel and counsel for the United States on whether the Constitution requires a minimum level of contact for imposing a sales tax collection obligation. He seemed skeptical that it did, which would mean on the one hand that small sellers might be subjected to serious burdens, but on the other hand would ameliorate the concern of an explosion of litigation over the level of contact required. He also remarked that the problem of uncollected sales and use tax seemed to be diminishing as Amazon and other large sellers are now collecting sales tax in all 50 states, which would tend to support the view that “we should leave Quill in place.” He later added that perhaps Congress has already made a decision to leave things as they have been for the last 25 years. Conversely, the Chief Justice criticized Wayfair’s counsel’s argument that reliance interests pointed towards keeping Quill in place, suggesting that a reliance interest based upon nonpayment of lawful use taxes is not one that should be respected.

Thus, the outcome of this case remains very much in doubt. Given the exchanges at the oral argument, however, it would not be surprising if the physical-presence rule again survives by a whisker, as it did in Quill a quarter of a century ago. With almost all of the largest Internet retailers now collecting sales taxes, it could be that the optimal time for persuading the Court to overrule Quill has passed and that the Court will now decide to stick with the devil that it knows instead of opening a new box of uncertainties. A decision in the case is expected by the end of June.

A copy of the oral argument transcript is linked below.

Wayfair – Oral Argument Transcript

Briefing Complete in Wayfair

April 13, 2018 by  
Filed under State Tax, Supreme Court, Wayfair

The parties have now completed the briefing in the Wayfair case involving sales tax collection by out-of-state sellers, which was discussed in previous posts here and here.  Oral argument is scheduled for April 17, and the Court is expected to issue its decision by the end of June.

The retailers’ response brief argues that the reliance interests and concerns about undue burdens on interstate commerce that motivated the Court’s decision to apply stare decisis principles and adhere to settled law in Quill remain in force today.  The brief focuses heavily on trying to rebut South Dakota’s contention that modern software has largely eliminated the burden for out-of-state sellers to collect taxes on behalf of many jurisdictions.  The brief also argues that the increase in online commerce does not provide a basis for departing from Quill, asserting that the amount of uncollected sales tax is actually diminishing and that there is no workable rule that has been proposed that could substitute for  the physical-presence rule.  Finally, the brief argues that overruling Quill could unfairly expose retailers to retroactive tax liability and urges the Court to leave it to Congress to determine how best to balance the competing considerations surrounding sales tax collection by out-of-state sellers.

The United States has filed an amicus brief supporting South Dakota.  It argues that Quill should be overruled if necessary, but also argues that “Quill‘s precedential effect is less sweeping than the courts below and the parties in this case have supposed” and invites the Court to uphold the South Dakota statute by limiting the reach of Quill to mail-order sales and holding that it does not impose a physical-presence rule for online retailers. Twelve other amicus briefs were filed in support of South Dakota, and 23 amicus briefs were filed in support of the retailers.  In addition, five amicus briefs were filed that were captioned as in support of neither party.

The parties’ briefs and the amicus brief of the United States are linked below.

Wayfair – Brief for Respondents Wayfair, Overstock, and Newegg

Wayfair – Brief for the United States

Wayfair – Reply Brief for South Dakota


Briefing Underway and Oral Argument Scheduled in Wayfair

February 28, 2018 by  
Filed under State Tax, Supreme Court, Wayfair

South Dakota has now filed its opening brief in the Wayfair case urging the Supreme Court to abandon the physical-presence requirement for the imposition of sales tax.  See our earlier report here.   Among the points stressed by the State are that the existing Quill rule is generally out-of-step with Commerce Clause jurisprudence; that Quill and its predecessor were decided in the context of mail-order businesses, prior to the explosion of online commerce, and therefore the Court does not have to conclude that those cases were wrongly decided at the time; and that current technology has eliminated the practical difficulties of sales tax collection from multiple states that previously concerned the Court.

Amicus briefs in support of South Dakota–and they are expected to be numerous–are due next Monday, March 5.  The companies’ response brief is due March 28, with supporting amicus briefs due a week later.

Oral argument is scheduled for April 17.

Wayfair – Opening Brief for South Dakota

Cert Granted in Wayfair

January 12, 2018 by  
Filed under State Tax, Supreme Court, Wayfair

The Supreme Court announced this afternoon that it will hear the South Dakota v. Wayfair case and consider the continuing viability of the physical-presence requirement for imposing an obligation on out-of-state businesses to collect and remit sales and use taxes.  See our prior report here.

The state’s opening brief is due on February 26.   The taxpayers’ response brief will be due at the end of March.   Oral argument will be scheduled for late April with a decision expected by the end of June.


Supreme Court Poised to Reevaluate the Constitutional Framework Governing Collection and Remittance of State Sales and Use Taxes by Out-of-State Sellers

January 10, 2018 by  
Filed under State Tax, Supreme Court, Wayfair

The Supreme Court may soon consider in a case entitled South Dakota v. Wayfair, Inc., No. 17-494, whether to discard the longstanding rule that states can require companies to collect sales and use tax only if they have a physical presence in the state. The rule dates back 50 years to National Bellas Hess v. Illinois Dep’t of Revenue, 386 U.S. 753 (1967), where the Court held that constitutional limitations on states’ jurisdiction found in both the Due Process and Commerce Clauses prevented states from imposing such a collection requirement on companies that lacked a physical presence in the state.

As time passed, however, mail-order businesses became much more prevalent, and this rule began to be seen as creating a serious problem for local businesses that had to collect sales taxes while competing against much larger national mail-order businesses that did not collect such taxes. In 1992, the Court revisited the physical presence rule in Quill Corp. v. North Dakota, 504 U.S. 298. To the surprise of many observers, the Court upheld the physical-presence requirement, relying heavily on the principle of stare decisis – that is, adhering to established precedent because of the reliance interests and expectations that were in place. Importantly, however, the Court departed from National Bellas Hess regarding the exact nature of the constitutional limitation. The Quill Court held that the Due Process Clause did not require the physical presence rule. Rather, the “substantial nexus” requirement, which the Court held required physical presence, was imposed only by the Commerce Clause, which is concerned with “the effects of state regulation on the national economy.” 504 U.S. at 312.

The significance of the Court’s determination to source the requirement in the Commerce Clause is that Commerce Clause restrictions are less absolute than Due Process Clause restrictions. The Commerce Clause is an affirmative grant of power to Congress, and the restrictions on state taxation that the Court has found in the Commerce Clause are justified as protecting that power by striking down state actions that intrude on interstate commerce. (Hence, this body of law is referred to as based on the “negative” or “dormant” Commerce Clause.) In practice, this means that Congress has the power to permit state actions that the Court has found violative of the Commerce Clause (even though Congress cannot permit actions that violate due process). In effect, the Quill decision punted to Congress the question of how states can fairly tax interstate commerce in the modern world—a question that has only grown in significance with the proliferation of the Internet e-commerce. See Quill, 504 U.S. at 318 (“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”); id. at 320 (Scalia, Kennedy, and Thomas, JJ., concurring in part and concurring in the judgment) (“Congress has the final say over regulation of interstate commerce, and it can change the rule of Bellas Hess by simply saying so.”). Congress, however, has not been up to the task and has not passed comprehensive legislation to address the issue.

In the meantime, the states have nibbled around the edges of Quill and largely succeeded in limiting its scope. Beginning with Geoffrey, Inc. v. S.C. Tax Comm’n, 437 S.E. 2d 13 (S.C. 1993), more and more states have used the concept of “economic nexus” to impose state income taxes on companies that lack a physical presence in the state. State courts have increasingly upheld these taxes by distinguishing Quill on its facts, even though the logical justifications proffered for having different rules and constitutional nexus standards for income taxes and sales taxes are not necessarily compelling. Nevertheless, the Supreme Court has repeatedly declined invitations to review these state court decisions and determine whether they are consistent with Quill.

In addition, states have imposed notice and reporting requirements on out-of-state businesses that stop short of imposing an actual collection requirement, but that are designed to assist the state in collecting the sales and use taxes directly from purchasers. These requirements may be more intrusive and burdensome on the sellers than an actual collection requirement, and therefore they can create a disincentive to out-of-state sellers to continue to resist a direct collection requirement. In Direct Marketing Ass’n v. Brohl, 135 S. Ct. 1124 (2015), the Court confronted one such statute from Colorado, but in a context that did not present the Court with the question of the statute’s constitutionality. The issue for the Court was whether the Tax Injunction Act barred the plaintiffs’ challenge to the statute. The Court found that the case could go forward and remanded to the court of appeals to consider the statute’s constitutionality.

Notably, however, Justice Kennedy wrote a concurring opinion in which he criticized Quill (even though he had concurred in the judgment in that case), stating that Quill has resulted in “a startling revenue shortfall in many States, with concomitant unfairness to local retailers and their customers who do pay taxes at the register.” Justice Kennedy concluded that it was time to reconsider the physical-presence rule in a case that properly presented the question, observing that Quill had failed to take into account “the dramatic technological and social changes that had taken place in our increasingly interconnected economy,” which have only increased over time, and that “it is unwise to delay any longer a reconsideration of the Court’s holding in Quill.” Id. at 1135.

South Dakota promptly responded to Justice Kennedy’s invitation by enacting a statute that requires companies to collect and remit use taxes even if they lack physical presence in the state. The statute was challenged and declared unconstitutional by the South Dakota Supreme Court on the authority of Quill, with the court recognizing the criticisms of Quill but noting that only the Supreme Court has the “prerogative of overruling its own decisions.”

A petition for certiorari from that decision is now pending before the Supreme Court, and the Court is expected to rule on the petition this month. Numerous amicus briefs have been filed in support of the petition, urging the Court to abandon Quill, although several others have been filed urging the Court to deny certiorari. The latter include a brief filed by some Senators and Congressmen who have sponsored legislation to address the issues and who urge the Court not “to give up on Congress.” A decision to grant certiorari could be announced as soon as this Friday, January 12, which would mean that the case would be argued in the spring and decided by the end of June.

One interesting brief is the one filed by the Tax Foundation. The Tax Foundation candidly acknowledges that it is “not a partisan for aggressive or expansive state tax power” and that it has consistently urged rulings against the state when addressing this issue in the past. Nevertheless, the brief asks the Court to grant certiorari, overrule Quill, and uphold the South Dakota statute. The brief explores the variety of ways in which states have sought to avoid Quill and asserts that the result is a patchwork of laws ultimately harming interstate commerce. By contrast, the Tax Foundation asserts that the South Dakota statute presents a fairer and more workable way of allowing states to impose sales taxes in the current business environment.

Finally, Justice Kennedy is not the only Justice to have gone on record with the view that Quill should be reconsidered. The Colorado notice-and-reporting statute at issue in Direct Marketing Association was upheld on remand from the Supreme Court by a panel of the Tenth Circuit that included then-Judge, now-Justice, Gorsuch. 814 F.3d 1129 (10th Cir. 2016). Justice Gorsuch wrote his own concurring opinion in that case, suggesting that Quill was intended to have an “expiration date” and remarking that it would be appropriate to allow Quill to “wash away with the tides of time.” Id. at 1151. There is a good chance that Quill will soon be swept away more directly and abruptly than first contemplated by Justice Gorsuch.

Wayfair – Petition for certiorari

Wayfair – Brief in Opposition

Wayfair – Reply Brief in Support of Certiorari Petition

Wayfair – Amicus Brief of Tax Foundation

Wayfair – Amicus Brief of legislators

Supreme Court Decision in Wynne Seeks to Clarify Commerce Clause Restrictions on State Taxation

July 16, 2015 by  
Filed under State Tax, Supreme Court, Wynne

[Note:  Miller & Chevalier filed an amicus brief in this case on behalf of the National Association of Publicly Traded Partnerships]

As discussed in our previous report here, Comptroller of Maryland v. Wynne presented the Supreme Court with a tricky constitutional issue because it implicated some fundamental principles found in the Court’s precedents, but those principles did not all point in the same direction.  In particular, Maryland relied on a state’s unquestioned power to tax the income of its domiciliaries wherever earned, while the taxpayers relied on the Commerce Clause’s limitations on double taxation.

The Court’s 5-4 May 18 decision in favor of the taxpayers produced a superficially unusual lineup.  The dissenters included the two Justices generally regarded as the most liberal, Justices Ginsburg and Kagan, and the two most conservative Justices, Thomas and Scalia.  In the state tax area, however, this lineup is not so surprising.  Although tax cases do not necessarily split along ideological lines, the more liberal Justices often are more likely to side with the tax authorities against wealthy taxpayers.  Justices Ginsburg and Kagan showed sympathy for the State’s position at oral argument, and they eventually voted in accordance with that position.  Justices Thomas and Scalia, by contrast, have a strong ideological view on Commerce Clause challenges to state taxes, and it was virtually a foregone conclusion from the start that they would vote to uphold Maryland’s taxation scheme.  In case anyone had forgotten his views, Justice Scalia (joined by Justice Thomas) wrote a 14-page separate dissent to “point out how wrong our negative Commerce Clause jurisprudence is in the first place.”

The majority opinion, written by Justice Alito, was largely unfazed by Justice Scalia’s attack on negative Commerce Clause jurisprudence.  The opinion acknowledged in one sentence that Justices Thomas and Scalia had disputed the validity of interpreting the Commerce Clause to have a negative component, but then observed that the doctrine has “deep roots” and moved on, except for a short discussion at the end of the opinion.  (Justice Scalia retorted that “many weeds” also have deep roots.)

The majority focused on trying to provide a relatively simple approach to the case under the Court’s existing precedents and on responding to Justice Ginsburg’s different reading of those precedents expressed in her dissent.  The Court majority thus rejected the State’s attempts to distinguish certain precedents on the basis of differences in the type of tax.  Specifically, the Court “squarely rejected the argument that the Commerce Clause distinguishes between taxes on net and gross income.”  And the Court similarly ruled that there was no basis for treating individuals less favorably than corporations under the Commerce Clause.

Having discarded these possible distinctions, the Court ruled that the validity of Maryland’s taxation scheme should be determined based on the “internal consistency test” previously applied in some corporate tax cases.  That approach figured more prominently in the Court’s jurisprudence in the 1980s and early 1990s, but had not been invoked much in recent years.  Several Justices, however, posed questions at oral argument concerning the test, and Maryland’s inability to show that its scheme satisfied the test proved fatal.  The Wynne decision now highlights the test as a key component of future challenges to state tax schemes that arguably create impermissible double taxation.  And by the same token, states devising new approaches to raising funds must focus on whether their taxing schemes are “internally consistent.”

The internal consistency test asks whether interstate commerce would be placed at a disadvantage if every state had the same taxing scheme as the one at issue.  The Court describes the test as allowing “courts to isolate the effect of a defendant State’s tax scheme.”  The Court explained that, if the tax fails the test, this means that it “inherently discriminate[s] against interstate commerce without regard to the tax policies of other States” and that the discrimination is not caused merely by “the interaction of two different but nondiscriminatory and internally consistent schemes.”

This approach led to an arguably paradoxical result in Wynne that was pointed out by the dissent.  Maryland’s taxing scheme failed the internal consistency test because of the combination of two features—failure to credit income taxes paid to other states and Maryland’s own taxation of in-state income earned by non-residents.  If every state had that taxing scheme, non-resident income would be taxed by multiple states, which would discriminate against interstate commerce.  If Maryland did not tax non-resident income, however, its scheme would no longer fail the internal consistency test.  Changing Maryland law in that way would save the constitutionality of the tax, even though it would not have helped the Wynnes in the slightest.  As Maryland residents, they would still have been subjected to full taxation by two different states on the same income without a credit.  The majority held, however, that this objection was irrelevant to the constitutional analysis.  The focus is on the inherent structure of a state’s tax, and the impact on a particular taxpayer is not determinative.

Finally, one other interesting aspect of the Court’s opinion was the prominence it gave to an amicus brief authored by a group of “tax economists” who argued that the Maryland taxation scheme operated economically like a tariff on out-of-state income.  That discussion illustrated how the Court focused on the economics of the taxation scheme and how the tax operated in the abstract.

In sum, Wynne will become a key precedent in future Commerce Clause challenges to state taxes, inviting an economic focus and demanding an analysis under the internal consistency test.

Wynne – Supreme Court decision

Supreme Court Set to Hear Argument in Wynne on Constitutionality of Failing to Give an Income Tax Credit for Taxes Paid to Other States

November 4, 2014 by  
Filed under State Tax, Supreme Court, Wynne

[Note:  Miller & Chevalier filed an amicus brief in this case in support of the taxpayers on behalf of the National Association of Publicly Traded Partnerships.]

Supreme Court briefing is now complete in Comptroller of the Treasury of Maryland v. Wynne, No. 13-485.  The issue presented is whether the U.S. Constitution requires a state to allow residents to take a credit against their state income tax liability for income taxes paid to other states on income earned in those states.

Maryland’s state income tax system taxes its residents at both the state level and the county level. Like other states, Maryland recognizes that its residents might earn income out-of-state that will be taxed by the state in which the income is earned, and it provides a dollar-for-dollar credit against the Maryland state income tax liability for those payments. Since 1975, however, Maryland has not provided a similar credit against the county income tax.

Whether Maryland’s failure to give a credit against the county income tax is constitutional depends on the application of the so-called “negative” or “dormant” Commerce Clause.  The Commerce Clause is an affirmative grant of authority to Congress to regulate interstate commerce, but the Supreme Court has long understood it to have a negative aspect as well, which “denies the States the power unjustifiably to discriminate against or burden the interstate flow of articles of commerce.” Oregon Waste Systems, Inc. v. Department of Environmental Quality, 511 U.S. 93, 98 (1994).  This principle often comes into play in invalidating state taxes that favor in-state businesses and in assessing the fairness of apportionment formulas used to calculate what portion of a multistate corporation’s income is taxable by a particular state.

The Maryland Supreme Court held that Maryland’s failure to grant a credit against the county tax resulted in impermissible double taxation.  The State, however, argues that nothing in the Supreme Court’s Commerce Clause jurisprudence requires a state to give such a credit.  To the contrary, Maryland argues, the Court has remarked that states have the power to tax the income of their residents, even if it is earned out-of-state, and that power should not be diminished just because of the decision of another state to tax the same income.  The taxpayers, however, note that the statements relied upon by Maryland were made in the context of the Due Process Clause and do not indicate that the Commerce Clause can abide the double taxation inherent in Maryland’s failure to give a credit.

Although all states, even Maryland, currently give a credit against the state income tax, the arguments for not requiring a credit against the county tax are equally applicable to the state.  Thus, if Maryland prevails in this case, it could open the door for cash-strapped states to decide to eliminate the credits that they currently provide.  (If that were to happen, Congress would have the power under the Commerce Clause to pass legislation requiring states to grant a credit.)  Thus, the potential importance of this case goes well beyond the particulars of the Maryland tax system, and the case has generated a slew of amicus briefs on both sides.  Linked below are the briefs filed by the parties, by the Solicitor General as amicus in support of Maryland, and by Miller and Chevalier on behalf of the National Association of Publicly Traded Partnerships in support of the taxpayers.

Oral argument is scheduled for November 12.

Wynne – Opening Brief for Maryland

Wynne – Brief for the Taxpayers

Wynne – Reply Brief for Maryland

Wynne – Amicus Brief for the United States

Wynne – Amicus Brief for NAPTP