Baker McKenzie attended the U.S. Supreme Court’s oral arguments yesterday in South Dakota v. Wayfair, Docket No. 17-494. At issue in the case is whether the Court should abrogate the physical presence nexus standard that it first articulated in National Bellas Hess v. Dep’t of Revenue, 386 U.S. 753 (1967), and later affirmed in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). The Court’s decision could have a profound impact on sales and use tax nexus in the United States by altering the limitations currently imposed on a state’s ability to require out-of-state retailers to collect such tax.
While the bench bombarded both sides with difficult questions, an overarching theme across the Court was whether they were the appropriate body to reconsider Quill, suggesting that Congress may be better equipped to resolve the remote sales tax collection issue. The Court’s focus on this issue is underscored by yesterday’s hearing transcript, which reflects that the word “Congress” was uttered 63 times during the one-hour oral argument. Stating that “Congress is capable of crafting compromises and trying to figure out how to balance the wide range of interests involved,” Justice Kagan highlighted the arguments surrounding why there could be benefits of leaving the decision up to the legislative process. Justice Alito, noting that state government and taxpayer interests are somewhat aligned in the sense of a shared desire for federal sales tax collection legislation, suggested that the climate is ripe for both parties to demand congressional action. Should the Court overrule Quill, he explained, the possibility of congressional action would become more remote, as states would no longer have an incentive to demand it.
Justice Breyer, who was one of the most vocal members of the bench during yesterday’s arguments, was troubled by the lack of empirical evidence to support either side’s claims. This sentiment was highlighted by Wayfair’s counsel at one point, when he stated “part of [the] problem is that there’s no record in this case.” Also a concern among the Justices was the potential problem of states retroactively pursuing historical sales and use tax liabilities should the physical presence standard be overruled. As both parties indicated that a prospective repeal of Quill would be inconsistent with the Court’s role, federal legislation would potentially be required to resolve any retroactivity issues.
Although it remains to be seen how the Court will rule, yesterday the Justices appeared to signal their preference for a legislative, rather than a judicial fix to any perceived problems created by Quill. The Court is expected to issue its decision by June of this year. Further insight into the South Dakota v. Wayfair oral arguments will be forthcoming on the SALT Savvy blog.