When the Supreme Court granted review in South Dakota v. Wayfair, the conventional wisdom was that the Court would likely overturn Quill Corp. v. North Dakota, and allow states to impose sales taxes on remote retailers (those with no physical presence in the state).

The skeptical questioning at Tuesday’s oral argument by a majority of the Court indicates a much rockier road for South Dakota and its allies – with the case’s outcome uncertain (transcript here).

What changed?

The Justices have realized that if Quill is overturned, the burden will fall on small and medium sized businesses. But they also know that they cannot determine with anything approaching certainty the nature and extent of that burden; and overruling Quill would leave these businesses wholly unprotected. In addition, because Congress can replace the Quill rule through legislation, it is better equipped to determine the relevant facts and craft a tailored legal standard, and is actively considering the question.  Indeed, option of leaving the issue to be resolved by Congress was a constant theme during the argument.

The questions during the argument focused almost exclusively on whether circumstances have changed sufficiently since Quill to displace the venerable principle of stare decisis.  But – as discussed at the end of this post – there are significant arguments that the Quill rule is correct.

First, the Government Accountability Office concluded in a detailed study issued in November 2017 that “[m]any of the largest Internet sellers are established retail chains or consumer brands with a physical presence, such as retail stores, in all, or nearly all, of the 45 states (plus the District of Columbia) that have a statewide sales tax.” As a result, the GAO found that states already receive sales/use tax on between 87 and 96 percent of sales by the top 100 online retailers. And that is the vast majority of sales tax on online sales: The GAO estimates the uncollected sales tax for 2017 at between 2 and 4 percent—and says that more tax is being collected on online sales than on other types of remote sales (such as those via telephone and mail order).

Second, that means the consequences of overruling Quill will fall almost exclusively on small and medium sized online businesses, as the Court’s questioning recognized. But, as Justice Breyer pointed out in a series of questions, the briefs before the Court painted contrasting pictures of these burdens, for example: “you have wildly different estimates of costs, revenues, and what states are losing or not”; “can you [find the correct tax rate] on the Internet [using software] – [the respondents] say there are 12 mistakes, even in South Dakota.”

But several points do seem clear.  South Dakota and its allies are wrong in asserting software is a complete answer to the burden issue.

In order to determine the tax applicable to a product or service, the seller must know which characteristics of each of its products are relevant to sales tax classification – and that varies dramatically among the 10,000 different sales tax jurisdictions.  eBay’s amicus brief explains that “[s]light product differences can engender significant taxability issues”—in Minnesota, blankets are taxable, but baby receiving blankets are not; deodorant is taxable in Texas, but deodorant with antiperspirant is not; tax rates can vary by price (in Connecticut, dresses over $1000 carry a higher tax rate), by use (in New Jersey, yarn for art projects is taxed but yarn for clothing is exempt); and by ingredients (Snickers are taxable in Illinois but Twix are not because items containing flour are not categorized as candy).

Software cannot provide an answer if the seller does not know what characteristics to flag. And the cost and accuracy of software is hotly debated in the briefs. The respondents’ brief cites an expert report filed in litigation that projects initial implementation and integration cost for a small to medium-sized business of $80,000 and $270,000, and annual costs of $57,500 to $260,000. South Dakota and its allies claim the initial cost is $12.

The respondents, their amici, and the GAO report point to a variety of errors in low-priced software that would subject sellers to draconian state-law penalties.  And, as respondents’ counsel pointed out during the argument, states have varying requirements for documenting that particular sales are exempt from tax because the goods are being purchased for resale or by a tax exempt entity.

Moreover, the cost of identifying the proper tax is the least of the burdens that would result from overturning Quill. A seller obligated to collect and remit sales tax is subject to audit by every state for which it collects taxes. For an on-line seller, that means dozens of States. And the associated costs are very substantial, and are accompanied by serious risks of draconian penalties, as discussed in the briefs filed by the United Network Equipment Dealers Association and American Academy of Attorneys-Certified Public Accountants.  (And states can and do target small businesses, especially small out-of-state businesses, with audits.)

The bottom line: small businesses operate on tight margins and would not be able to absorb these new tax collection costs The amicus briefs filed by eBay and 51 small businesses, Etsy, and the National Auctioneers Association explain in detail, with examples provided by specific businesses, why the Quill rule was essential to creating their businesses and that changing the law to impose tax-collection obligations would force them out of business.

Justice Gorsuch pointed out that courts upheld a Colorado law requiring out-of-state retailers to notify customers of their obligation to pay use tax and to report sales information to a state’s revenue collection department. He asked whether the burden on small businesses of collecting sales tax would be greater than this reporting obligation.

Respondents’ counsel responded that the first report under this statute has not yet been filed, and there accordingly is no information about the costs of compliance. But it is self-evident that submitting a list of customers’ names, addresses, and purchases will impose little or no burden – because online companies compile and retain that information in the regular course of business in order to keep track of their customers and their interests. Pulling the Colorado addresses from an existing list or database could not be a time-consuming task. And it certainly is substantially less burdensome than the multiple costs that burden a small business that is subject to sales tax.    

Third, the Supreme Court has recognized that “a reasonable possibility that parties have structured their business transactions in light of” the challenged precedent is an important reason to let the precedent stand. There is no doubt that small and medium sized online business have structured their operations in reliance on the 50-year old legal principle that physical presence is an essential prerequisite to sales tax responsibility (the rule established in National Bellas Hess and reaffirmed in Quill).

The Chief Justice asked whether these businesses were relying “not just [on] the fact that they don’t have to collect, but [on] the fact that most people aren’t paying use taxes” – perhaps indicating that these businesses’ reliance may not be on the Quill rule itself but rather on the unrelated fact that use taxes aren’t vigorously enforced. 

In fact, the critical issue for small and medium sized businesses is protection against the economic burdens on the company associated with complying with multiple states’ tax collection rules and the broad exposure to audit costs and draconian penalties. They are not relying on the cost difference to the consumer resulting from the seller’s non-collection of the sales tax.

That is because, from the consumer’s perspective, there are several key differences between an online purchase and an in-person purchase:

  • The in-person seller likely will collect sales tax, but will not impose a shipping charge, enables the customer to examine the item before purchasing it and obtain the item immediately, and provides a convenient location for service help and to return the purchase. 
  • The small online seller may not collect sales tax but likely will charge a shipping fee, and the customer cannot examine the item or obtain it immediately, but the customer can shop from home.  Service and returns may be more difficult.


The difference in sales tax collection is just one of many differences in the two types of transactions – and the simplistic “level the playing field” argument advanced by South Dakota and its allies does not reflect market reality.

Fourth, the oral argument made clear that overturning Quill will leave small and medium sized online businesses subject to whatever obligations states choose to impose.

As the federal government’s lawyer candidly acknowledged, the shipment of just a single item is sufficient: “there’s no constitutional minimum . . . if you have an out-of-state retailer who is deliberately . . . shipping the good into the state for delivery to the customer and transfer of title that is a sufficient basis for subjecting the retailer to the tax collection obligation.”

South Dakota’s lawyer at one point suggested “that’s what Pike [v. Bruce Church, Inc.] is for, is to determine in a balancing if there is a constitutional concern.” But he later agreed that an online business’s single sale into a state would be sufficient.

Moreover, any protection that small sellers might have under Pike or under due process principles would take years of litigation to establish, as Justice Sotomayor made clear in her questioning.  In the meantime, with any constitutional rules uncertain, small businesses would have to comply with state tax laws to avoid the risk that they might be unprotected and subject to severe penalties for noncompliance with the laws of multiple states. Indeed, the federal government lawyer acknowledged that “if the Court issued that ruling, many states would adopt regimes that are less hospitable to retailers.”

That is why the Court could not adopt the federal government’s suggestion that the Court could simply uphold the South Dakota statute, which has a small business exemption, and leave open the question whether such an exemption is constitutionally required. (Moreover, the South Dakota statute provides little real world protection, because 200 sales into South Dakota triggers the tax; so a small Etsy business that sells 200 potholders to South Dakotans would have to pay the tax.)

The federal government also acknowledged that any decision overruling Quill would necessarily open the door to retroactive tax liability, because the Court could not act prospectively given its precedent (James B. Beam Distilling Co. v. Georgia) holding that “when the Court has applied a rule of law to the litigants in one case it must do so with respect to all others not barred by procedural requirements or res judicata.”

That could mean hundreds of millions of dollars in retroactive liability for small and large sellers. The Tax Executives Institute—a broad-based group of corporate in-house tax professionals—explains in its brief that 28 states have laws permitting retroactive application of a decision overruling Quill and that would shift the economic burden of these taxes “from consumers to retailers and penalize[e] retailers that relied on the bright line test afforded by Quill.”

Fifth, Justice Ginsburg and Justice Kennedy suggested several times during the argument that the Court has an obligation to correct Quill if that ruling was erroneous, even though Congress has the power to overturn Quill by statute.  As Justice Kennedy said to respondents’ counsel, “you want Congress to act against the background in which this Court has made an incorrect resolution of the law.”

But that will always be true when the Court adheres to precedent that might be incorrect, and the Court has emphasized that “[r]especting stare decisis means sticking to some wrong decisions” and stare decisis is particularly strong, “superpowered” as the Court put it, in cases of statutory interpretation because Congress can step in and overturn any inappropriate rule. That principle applies even in cases such as Halliburton Co. v. Erica P. John Fund, Inc., where the precedent left standing rests on a “judicially created doctrine” with no basis in congressional action – a situation very similar to the one presented here.

Moreover, Congress has been considering the proper standard for subjecting online businesses to sales tax obligations. But, as a bipartisan group of 15 Senators and Representatives put it in their amicus brief, congressional consideration is “on hold” during the pendency of this case, because South Dakota and its amici “hope[] for a winner-take-all result in court they know they cannot obtain in Congress.” 

Sixth, the oral argument barely touched on the strong arguments that the Quill rule is right on the merits.

Justice Ginsburg stated that the South Dakota statute leveled the playing field between online-only and storefront-only merchants, and therefore does not discriminate against interstate commerce – indicating that she saw no constitutional problem.

But the Commerce Clause embodies more than an anti-discrimination principles. It also prohibits barriers and impermissible burdens on interstate commerce as well as extraterritorial regulation. 

The heavy burden on out-of-state small businesses engaged in multi-state commerce—a burden not at all commensurate with the benefits those companies derive from the states imposing the obligation—should be sufficient to trigger Commerce Clause protection. Moreover, the South Dakota statute reaches into other states to impose burdens on those states’ citizens, violating the Clause’s territoriality principle, as the Cato and ALEC briefs explain.

Quill also vindicates the Constitution’s structural protections ensuring “horizontal federalism”—limiting on a state’s power to regulate the citizens of another state.  As the National Taxpayers Union, et al., brief, written by former Solicitor General Paul Clement, explains, the Quill rule serves as “a vital limit” on a state’s power “to force out-of-state retailers with no voice in the state’s political process to serve as the state’s private tax collector.” “The principal objection to the Stamp Act and the Tea Act was not that collecting the taxes was burdensome. The problem was far more fundamental—namely, that the burdens were imposed by a distant Parliament in which the colonists were denied representation. . . . [S]ince the ballot box imposes no constraint on offloading enforcement obligations on nonresidents, only the Constitution prevents states from yielding to that temptation.”

It is striking that in its order list issued the day before the Wayfair argument, the Court sought the United States’ views with respect to two original actions (No. 148 and No. 149) that assert very similar constitutional claims.  Each involves a claim that a state is extending its laws impermissibly to regulate the citizens of another state – in those cases by banning the importation of agricultural products produced by what the regulating state believes to be inhumane methods.  That is the same constitutional theory advanced to support the Quill rule in the briefs just discussed.

Certainly there was no interest by the Court in the extraordinarily expansive view of state regulatory authority asserted by the United States.  Its argument that the ability to access a website from a state gives that state regulatory authority over the website operator is breathtaking in its scope.  It would permit every state to regulate any enterprise that operates websites, and could subject an online speaker to suit in every state—something that courts of appeals have uniformly rejected. Subjecting websites to such multiple burdens would strangle online commerce in particular and the Internet in general.

In sum, the Wayfair oral argument revealed very substantial concerns about the real-world consequences of overruling Quill – and therefore significant interest in leaving resolution of the issue to Congress.

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Mr. Pincus is outside counsel to eBay and wrote an amicus in South Dakota v. Wayfair on behalf of eBay and independent small businesses in all 50 states.