South Dakota v. Wayfair – Insights from the Oral Arguments

Supreme Court Hears Oral Arguments on Quill Physical Presence Nexus Standard

The Supreme Court recently heard the much-awaited oral arguments on the state sales and use tax nexus issue raised in South Dakota v. Wayfair (cert. granted 1/12/2018, No. 17-494) – whether states may tax online retailers without a physical presence within their borders (Quill Corp. v. North Dakota, 504 U.S. 298 (1992)).  The arguments were heard against the backdrop of a sea of amicus briefs and commentary on the issue.  Following the oral arguments, legal and tax experts continue to glean any insights from the oral arguments and the comments made by the Justices as to how the Court might decide the case.

Brief Background on Wayfair and Quill

The South Dakota law that is at issue in Wayfair is S.B. 106, effective May 1, 2016, which provides that any entity exceeding an annual sales threshold of $100,000 or 200 separate transactions in South Dakota collect and remit South Dakota sales tax.  This is often referred to as “economic nexus” rather than “physical presence nexus.” Other states have legislated this approach, as well as many other “approaches” to nexus, including so-called “click-through,” “Amazon affiliate” and/or “attributional” nexus statutes in order to address the Constitutionally required “sufficient connection” (nexus) that meets both the commerce and due process clauses.

If the Supreme Court changes or modifies the physical presence standard, new nexus tracking rules will have to be put in place to reflect the new standards.  This will significantly increase the risks of noncompliance in states where previously there was no nexus and therefore no risk of noncompliance.  This will affect the planning and compliance work for businesses, which include not just Internet retailers, such as Amazon, Etsy, eBay and, of course, the tens of thousands of smaller sellers of goods and services, but also digital goods and software as a service (“SaaS”), which can be bought via the Internet and accessed via cloud technology. In addition, tax advisors of these businesses will have their compliance, provisioning and planning work cut out for them, as well as the companies that provide sales and use tax (SUT) content and software solutions to solve a customer’s SUT compliance problems.

What Can be Gleaned from the Oral Arguments in Wayfair?

A case that is selected for argument usually involves interpretations of the U. S. Constitution or federal law. In the Wayfair case, it is a constitutional issue around the Commerce Clause and the Due Process Clause as applied to a state statute.  No one knows exactly when a decision will be handed down by the Court in an argued case, nor is there a set time period in which the Justices must reach a decision. However, all cases argued during a term of Court are decided before the summer recess begins, usually by the end of June.  A decision in Wayfair is expected to be reached in June.

Over the years, legal and tax pundits have spent much time trying to outguess the Court on what it will decide by employing a variety of factors such as:  the tone and substance of the judges’ questions on oral argument, when the court hears oral arguments (earlier or later in the term), how many amicus briefs are filed, which judges were most vocal, it is a “big case,” etc.  See for example a study in the Duke University Law Journal [  or a study specifically on whether oral arguments matter [].

During the oral arguments, the Justices predominantly focused on a few key issues:

  1. Conflicting estimates of digital sales tax compliance costs. Attorneys representing parties in South Dakota v. Wayfairindicated seller compliance costs between $12 and $250,000. Justice Stephen Breyer, in particular, was perplexed over the estimate gap, addressing it numerous times throughout the argument. Breyer said to George Isaacson, counsel for e-retailers Wayfair Inc., Newegg Inc., and com Inc.: “And you say: It’s going to cost thousands and thousands of dollars for a small business, maybe all their profits eaten up in hiring accountants. They say: That won’t be necessary. We’ll do it on software.” “Both are logical. How do I decide who’s right?”

Fred Nicely, senior tax counsel for the Council on State Taxation, has said that it would be hard to land on a rough estimate for small and medium-sized businesses because of the number of tax rates in each state.

“I don’t think there’s a compliance estimate that would apply to a seller in all states,” Nicely said. “Each state’s amount of tax jurisdictions varies greatly. We could come to a conclusive estimate if more states adopted uniform laws.”

In fact, sellers must comply with different state tax collection regimes including:

  • economic nexus models that impose sales tax collection duties on retailers that rise above a specified sales threshold;
  • Colorado-style notice/reporting regimes that require retailers to alert customers to their tax liabilities;
  • marketplace provider provisions that require Amazon-type sellers to collect sales tax on third-party transactions conducted on their platforms; and
  • “cookie nexus” regulations, which require online vendors to collect state sales tax if they have property interests in or use in-state apps and “cookies.”
  1. Opening the door to the states. A few justices were concerned that if they overturned Quill, desperate states and municipalities would extend the collection of sales and use tax requirements to even those small entrepreneurs and startups who have as few as even one online transaction. Also, they believe that states can pass laws themselves requiring that retailers provide records of customers and transactions to the taxing authorities who would then have the option to go directly after consumers to collect the sales tax. Draconian perhaps, but not prohibited by the Constitution, the Commerce Clause or anything else in law.
  2. Concern that states will pass laws imposing the sales tax retroactively.
  3. Policy rather than tax issue. One that should be decided by Congress rather than the courts.
  4. Problem is not Quill, rather states have not created adequate mechanisms for collecting tax due. This argument was set forth by Justice Sotomayor as the initial comment made by the Justices.

House Judiciary Committee Chairman Bob Goodlatte told me that he believes, as mentioned by a couple of the Justices, that this is a policy issue, not a tax issue, and it’s the responsibility of Congress, not the Courts, to regulate interstate commerce and legislate a solution in this area. Chairman Goodlatte has been at the forefront of keeping Internet sales free from sales tax. While there are several bills working their way through Congress addressing online sales tax, as the attorneys for South Dakota have pointed out, Congress has been unable to deal with this issue for 26 years.

 What Should Sellers Do Now?

A potential June decision gives sellers who aren’t collecting sales tax a limited amount of time to consider their options for how to comply.

Harley Duncan, leader of the state and local tax group of the Washington National Tax practice at KPMG LLP, believes that sellers need to look ahead now, analyze where they conduct business, and decide whether compliance is the right choice.

“The things I would focus on if I were a seller are understanding where I currently collect and where I might have to soon collect, if Quill is undone.” “You also have to look at what technology platform, if any, you’re currently using, and what platform you might adopt in the near future.”

“It is also critical for sellers to make sure they understand the cost, complexity, and time it would take to integrate a [sales] tax software program, which he said could take months to sufficiently install and set up.”

Wolters Kluwer Can Help

Stay tuned to the Wolters Kluwer Indirect Tax Blog as we follow and report on this important case and other marketplace changes related to your sales tax obligations. In the meantime, if you are unsure where you have nexus, consider a Nexus Study from Wolters Kluwer. Additionally, Wolters Kluwer offers SaaS and on-premise Sales Tax Calculation software to help you efficiently and effectively meet your sales and use tax obligations.


Mark Friedlich

All stories by: Mark Friedlich

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