The first New York meeting of McDermott’s Tax in the City® initiative in 2018 coincided with the June 21 issuance of the US Supreme Court’s (SCOTUS) highly anticipated Wayfair decision. Just before our meeting, SCOTUS issued its opinion determining that remote sellers that do not have a physical presence in a state can be required to collect sales tax on sales to customers in that state. McDermott SALT partner Diann Smith relayed the decision and its impact on online retailers to a captivated audience. Click here to read McDermott’s insight about the decision.
Moments ago, the US Supreme Court issued its highly-anticipated decision in South Dakota v. Wayfair, Inc., et al., No. 17-494. The 5-4 opinion was authored by Justice Kennedy and concluded that the physical presence requirement established by the Court in its 1967 National Bellas Hess decision and reaffirmed in 1992 in Quill is “unsound and incorrect” and that “stare decisis can no longer support the Court’s prohibition of a valid exercise of the States’ sovereign power.” This opinion will have an immediate and significant impact on sales and use tax collection obligations across the country and is something every company and state must immediately and carefully evaluate within the context of existing state and local collection authority.
Summary of Opinions
The majority opinion was authored by Justice Kennedy and was joined by Justices Thomas, Ginsburg, Alito and Gorsuch. In reaching the conclusion that the physical presence rule is an incorrect interpretation of the dormant Commerce Clause, the opinion states that the Quill physical presence rule: (1) is flawed on its own terms because it is not a necessary interpretation of the Complete Auto nexus requirement, creates market distortions and imposes an arbitrary and formalistic standard as opposed to the case-by-case analysis favored by Commerce Clause precedents; (2) is artificial in its entirety and not just at its edges; and (3) is an extraordinary imposition by the Judiciary. The majority went on to conclude that stare decisis can no longer support the Court’s prohibition of a valid exercise of the States’ sovereign power, noting that “[i]t is inconsistent with this Court’s proper role to ask Congress to address a false constitutional premise of this Court’s own creation.” The majority noted that the South Dakota law “affords small merchants a reasonable degree of protection” and “other aspects of the Court’s [dormant] Commerce Clause doctrine can protect against any undue burden on interstate commerce.” The majority opinion specifically notes that “the potential for such issues to arise in some later case cannot justify an artificial, anachronistic rule that deprives States of vast revenues from major businesses.” Finally, the majority decision provides that in the absence of Quill and Bellas Hess, the first prong of Complete Auto simply asks whether the tax applies to an activity with substantial nexus with the taxing State and that here, “the nexus is clearly sufficient.” Specifically, the South Dakota law only applies to sellers that deliver more than $100,000 of goods or services into the State or engage in 200 or more separate transactions, which “could not have occurred unless the seller availed itself of the substantial privilege of carrying on business in South Dakota.” With respect to other principles in the Court’s dormant Commerce Clause doctrine that may invalid the South Dakota law, the majority held that “the Court need not resolve them here.” However, the majority opinion does note that South Dakota appears to have features built into its law that are “designed to prevent discrimination against or undue burdens upon interstate commerce” including: (1) a safe harbor for small sellers; (2) provisions that prevent a retroactive collection obligation; and (3) the fact that South Dakota is a member of the Streamlined Sales and Use Tax Agreement.
Justice Thomas and Justice Gorsuch both wrote a standalone concurring opinions. Justice Thomas acknowledged that he should have voted with Justice White in Quill to overturn Bellas Hess and Justice Gorsuch seemed to caution his concurrence should not be read as an agreement with all aspects of the dormant Commerce Clause (perhaps looking forward to future issues that may be before the Court).
Chief Justice Roberts wrote the dissenting opinion, which was joined by Justices Breyer, Sotomayor and Kagan. The dissent argues that any alteration to the physical presence rule should be undertaken by Congress and that departing from the doctrine of stare decisis is an exceptional action demanding special justification, which is even further heightened in the dormant Commerce Clause context. The dissenting opinion went on to note that the majority “breezily disregards the costs that its decision will impose on retailers” and that the “burden will fall disproportionately on small businesses” which they note is something Congress could fix as part of a legislative solution. The Chief Justice Robert’s dissent concludes that “I fear the Court today is compounding its past error by trying to fix it in a totally different era.”
Practice Note and Next Steps
Today’s opinion raises no shortage of questions that will be discussed and further evaluated over the coming weeks and months. One thing that is clear from the decision is that the Court is still concerned about potential undue burdens that state tax systems may impose on businesses, particularly small businesses. The Court appears to have concluded that South Dakota’s imposition does not run afoul of those concerns, however, the door is open as to whether other states’ tax systems would satisfy the new requirements. The Court repeatedly emphasized that South Dakota’s participation in the Streamlined Sales and Use Tax Agreement was an important factor in upholding the imposition of tax. The Court also cited South Dakota’s lack of retroactivity and a threshold as important factors as well.
States will obviously rejoice at the decision. Expect states to seek legislative and regulatory expansion of their “doing business” laws to align with the South Dakota v. Wayfair opinion, with significant activity in the next round of state legislative sessions.
The Court reiterated that Congress may act to address any of the concerns with the new standard. In fact, Justice Kennedy’s majority opinion acknowledges that “Congress may legislate to address these problems if it deems it necessary and fit to do so.” Although little progress has been made in Congress on this issue for some time, the landscape is now changed and that may result in pushing Congress to act.
On October 2, 2017, the State of South Dakota (State) filed its petition for a writ of certiorari with the United States Supreme Court (Court). A copy of the cert petition is available here and the case, South Dakota v. Wayfair, Inc. et al., is expected to be docketed on October 3, 2017. The State is asking the Court to overturn its physical presence standard used to determine whether an entity has substantial nexus under the dormant Commerce Clause. This comes only a few weeks after the South Dakota Supreme Court ruled against the State in favor of the online retailer defendants, citing the Court’s physical presence standard upheld in Quill on stare decisis grounds.
This development comes as no surprise to the state and local tax community, and begins what is likely to be one of the most closely watched cert petitions in years. Going forward, the online retailers have three options: (1) acquiesce that the Court should grant cert; (2) waive their right to file a response to the cert petition; or (3) file a brief in opposition. If the online retailers choose the third option, they will have 30 days from today (if the case is in fact docketed today) to file their brief in opposition. This deadline is subject to extensions, upon request (the first of which is always granted as a matter of right). We expect a number of groups to file amicus curiae briefs regarding this cert petition given the significance of the issue raised. If the online retailers do file a brief in opposition, the State will be given an opportunity to file a reply brief, rebutting the points made by the online retailers and reiterating the arguments made in the State’s cert petition. Unlike the cert petition and the brief in opposition, which must be filed with the Court under strict deadlines, the exact timing of the reply brief varies. As a general rule of thumb, a reply brief is usually filed approximately 10 days after filing of the brief in opposition.
While this dispute is a long way from being heard by the Court on the merits (if at all), the cert petition is a critical first step that will have implications to Congress, the courts, state legislatures, taxpayers, and revenue departments across the country. Stay tuned for more coverage of this cert petition and the developments that follow.