Supreme Court Hears Oral Argument On Internet Sales Tax Collection

The Supreme Court heard argument yesterday on the issue of whether online sellers can be required to collect sales taxes, and the status of the issue remains as confused as ever.

The Supreme Court heard oral argument yesterday in a case that could have a huge impact on businesses that do business online, and on states that impose sales and use taxes:

WASHINGTON — A closely divided Supreme Court struggled on Tuesday to decide whether internet retailers should have to collect sales taxes in states where they have no physical presence.

Brick-and-mortar businesses have long complained that they are disadvantaged by having to charge sales taxes while many of their online competitors do not. States have said that they are missing out on tens of billions of dollars in annual revenue under a 1992 Supreme Court ruling that helped spur the rise of internet shopping.

By the end of arguments on Tuesday, it was not clear whether there were five votes to overrule the 1992 decision, Quill Corporation v. North Dakota, which said the Constitution bars states from collecting sales taxes from companies that do not have a substantial connection to the state.

Several justices expressed concerns about imposing crushing burdens on small businesses that sell goods on the internet and about making them liable for back taxes. Justice Sonia Sotomayor said the case before the court, South Dakota v. Wayfair, No. 17-494, raised “a host of questions” and “a whole new set of difficulties.”

Sounding almost plaintive, she added that Congress, rather than the Supreme Court, was the right forum in which to settle the matter.

“Is there anything we can do to give Congress a signal that it should act more affirmatively in this area?” Justice Sotomayor asked.

But Chief Justice John G. Roberts Jr. said that “it would be very strange for us to tell Congress it ought to do something in any particular area.”

Both he and Justice Elena Kagan said the fact that Congress has so far chosen not to act was itself a telling indication that it was satisfied with the current system.

The chief justice added that the marketplace may already be addressing the problem.

“The bigger e-commerce companies find themselves with a physical presence in all 50 states,” he said, “so they’re already covered.”

The tenor of the argument was a surprise, as three members of the Supreme Court had indicated that they may be ready to reconsider the Quill decision. Justices Clarence Thomas and Neil M. Gorsuch havewritten about their uneasiness with the ruling and the constitutional justifications for it.

Justice Gorsuch seemed prepared on Tuesday to reconsider the Quill decision. “Why should this court favor a particular business model?” he asked.

In a 2015 concurring opinion, Justice Anthony M. Kennedy seemed to call for a fresh challenge to the decision.

“It is unwise to delay any longer a reconsideration of the court’s holding in Quill,” he wrote. “A case questionable even when decided, Quill now harms states to a degree far greater than could have been anticipated earlier.”

South Dakota responded to Justice Kennedy’s invitation by enacting a law that required all merchants to collect a 4.5 percent sales tax if they had more than $100,000 in annual sales or more than 200 individual transactions in the state. State officials sued three large online retailers — Wayfair, and Newegg — for violating the law.

“The South Dakota law is obviously a test case,” Justice Samuel A. Alito Jr. said on Tuesday. “It was devised to present the most reasonable incarnation of this scheme.”

“But do you have any doubt,” Justice Alito asked a lawyer for the federal government, “that states that are tottering on the edge of insolvency and municipalities, which may be in even worse position, have a strong incentive to grab everything they possibly can?”

The lawyer, Malcolm L. Stewart, who argued in support of South Dakota, did not disagree.

“Many states would adopt regimes that are less hospitable to retailers” if the court allowed them to require the collection of taxes, he said, “unless they were stopped from doing that by Congress.”

Justice Alito suggested that a decision from the Supreme Court could short-circuit a more nuanced legislative consideration of the issue. “As things stand now,” he said, “it seems that both the states and internet retailers have an incentive to ask for a congressional solution to this problem.”


At Tuesday’s argument, Marty J. Jackley, South Dakota’s attorney general, argued that the Quill decision did not make sense in the digital era. He said that the major practical problem it had identified — that it would be burdensome for out-of-state retailers to calculate and collect taxes for thousands of state and local jurisdictions — had been solved by modern software.

But that assertion was hotly disputed by George S. Isaacson, a lawyer for the three internet retailers, who said a ruling against his clients would impose burdens on small online merchants. A national solution, he said, should come from Congress rather than the Supreme Court.

Some justices complained that they lacked fundamental information about how hard it is to collect the taxes and how much money is at stake. The two sides, Justice Stephen G. Breyer said, were of little help. Estimates of how much it would cost internet businesses to comply with the tax laws of what were said to be 12,000 state and local jurisdictions varied from $12 to $250,000.

Justice Ruth Bader Ginsburg said there could be a market solution, too. “If we did overrule Quill,” she said, “entrepreneurs would produce software that would meet the market need.”

Mark Walsh summarizes the oral argument in more detail for SCOTUSBlog:

The high stakes of the case seemed evident throughout the argument, though the justices took note of the fact that there was wide disagreement about the relevant numbers.

South Dakota contends that it is missing out on about $50 million in sales tax revenue under the Quill rule, a significant sum for a state with no income tax. The state also cites in its brief an estimate from researchers that all the states and local jurisdictions with sales taxes are missing out on $34 billion in revenues because of Quill this year.

The three web retailers who are respondents in this case — Wayfair Inc., Inc., and Newegg Inc. — cite a 2017 Government Accountability Office study that is more conservative, offering an estimate of lost revenue between $8 billion and $13 billion for this year.

“You have wildly different estimates of costs, revenues, and what states are losing or not,” Justice Stephen Breyer pointed out to Jackley. He also asked about retroactivity and the standard for determining sales-tax liability.

“When it comes to retroactivity, the states don’t want to address this retroactively, which is why South Dakota, illustrative of that, has indicated we’re prospective only,” Jackley said. “In the briefing, 38 other states have indicated their laws would prevent retroactivity.”

Chief Justice John Roberts asked Jackley whether the nation was perhaps past the stage when many large Internet retailers were not collecting sales taxes, in part to enjoy a price advantage over brick-and-mortar stores.

“The suggestion in some of the briefs is that this is a problem that has peaked in the sense that the bigger e-commerce companies find themselves with physical presence in all 50 states,” Roberts said. “So they’re already covered. And the work-arounds that some of the states have employed are also bringing more [sellers] in. And if it is, in fact, a problem that is diminishing rather than expanding, why doesn’t that suggest that there [is] greater significance to the arguments that we should leave Quill in place?”

Jackley replied that e-commerce continues to expand, and the states are expected to miss out on some $100 billion in revenue over the next 10 years.


When George Isaacson, the Lewiston, Maine, lawyer representing the retailers, began his argument time, he quickly ran into a concern from Ginsburg.

“How about going back to the very basic issue?” she said. “The assertion is that asking an out-of-state seller to collect tax on goods shipped in-state discriminates against interstate commerce. But, as I see it, why isn’t it, far from discriminating, equalizing sellers. That is, anyone who wants to sell in-state, whether an in-state shop, an out-of-state shop, everybody is treated to the same tax collection obligation. All who exploit an in-state market are subject to the in-state tax. Why isn’t that equalizing rather than discriminating?”

Isaacson replied, “Well, the dormant Commerce Clause takes as its principal objective the maintenance of a single national marketplace that is free and accessible to all participants.” He pointed out that at the time of the Bellas Hess decision in 1967, there were some 2,300 taxing jurisdictions, a figure that had jumped to 6,000 at the time of the Quill ruling in 1992, and to today’s estimate of 12,000. “So the concern that the Bellas Hess and Quill courts had was the notion that a free and open market would be encumbered by that degree of complexity,” Isaacson said. “And that complexity has only worsened over time.”

Justice Neil Gorsuch, who as a member of the U.S. Court of Appeals for the 10th Circuit wrote a concurrence that questioned the vitality of Bellas Hess and Quill, pressed Isaacson on why, when brick-and-mortar stores must comply with sales tax obligations, the court should favor ” a particular business model that relies not on brick and mortar but on mail order?”

“I understand in Bellas Hess the court was concerned about a nascent, small mail order industry,” Gorsuch said. “Those concerns seem a little antiquated today.”

Isaacson replied that “Borders count. States exercise their sovereignty based upon borders, territorial limits.  It’s a key part of horizontal federalism in this country. So, if there’s going to be some standard that determines when is a company subject to the tax jurisdiction of a state, using the territorial limits of that state make sense.”

Isaacson said that Congress would be the best branch to address the issues of sales-tax collection for out-of-state sellers, such as by requiring one tax rate per state for all remote sales. “It can require a clearinghouse that can be used for the processing of payments,” he said. “It can require standard uniform definitions of products so that food and sportswear and clothing doesn’t mean one thing in one jurisdiction and another elsewhere.”

When Sotomayor asked Isaacson whether there was anything the court could do to signal to Congress “to act more affirmatively in this area,” Isaacson said, “I would welcome a decision from this court that would indicate that Congress should move forward with consideration and action upon legislation.”

This prompted an observation from the chief justice that lawmakers perhaps have already decided “that this is something they’re going to leave the way it has been for, whatever it is, 25 years.” “I think it would be very strange for us to tell Congress it ought to do something in any particular area,” Roberts said. “Just a thought.”

As I’ve said repeatedly in the past, it’s often difficult to determine how a Court may rule based solely on oral argument, the comments that the Justices may have made, or the questions they asked. In this case the apparent dilemma that the Justices colloquies and questions seem to reveal based on these reports could as much be evidence of internal debate that will take place when the Justices meet to discuss this case on Friday and an effort to influence the direction of that debate as it is evidence of where particular Justices may stand on the issue. Additionally, the fact that Justice Sotomayor made brief mention of the desire that Congress should be the one to act on this matter is likely an indication of the fact that the Court has previously stated in its opinions on this issue that the legislative branch could ultimately resolve this issue on its own regardless of what the Supreme Court has to say on the matter and that its most recent decision in this area was effectively an open invitation for such action. While several bills have been introduced in Congress on the matter since then, none has even made it through one chamber of Congress never mind made it to the President’s desk. Given that, the odds that Congress is going to act on this issue any time soon seem to be remote, which means that for better or worse the matter is left to the Supreme Court to decide in the interim.

As far as the law prior to today’s argument is concerned, the Supreme Court’s previous rulings on this issue have been relatively clear, and stand for the proposition that a business can only be required to collect sales tax in jurisdictions where it has some connection beyond merely selling a product to someone residing there.  The first such decision was handed down in 1967 in National Bellas Haas v. Department of Revenue. In that case, the Court ruled that a mail-order catalog business was not required to collect sales tax on behalf of states in which it does not have a physical presence. Twenty-six years later, the Court ruled in 1993 in Quill Corp. v. South Dakota in a manner that somewhat overruled the central holding Bellas Haas but did not completely throw the precedent out. Specifically, the Quill ruling still established that the Commerce Clause prevented states from requiring businesses without an in-state physical presence from collecting sales taxes. Both Bellas Haas and Quill pre-date the vast expansion of the Internet that began with the creation of the World Wide Web and the rise of e-commerce sites or smaller businesses who used e-commerce portals to sell products to people living in other states. Nonetheless, both cases have been used to set forth the general rule that online merchants, regardless of their size, are not required to collect sales tax in jurisdictions that they do not have a physical presence in. That rule continues to exist today, although as one of the Justices noted, it has been obviated to some extent by the fact that many large online retailers such as Amazon now have a physical presence in nearly every state that has a sales tax.

Lyle Denniston’s commentary on the oral argument deals with the state’s argument against the viability of the Quill precedent:

That ruling makes no sense, at any level, the states argue, because the out-of-state sellers are doing a big-time business in all of the states – via the circuitry of home-bound shoppers’ computers or smartphones.  (One of those sellers, sued in this case, is Wayfair, Inc., which floods TV these days with ads telling how much “fun” it is to simply click and be “done” with buying goods that miraculously just drop into place in a home. A chorus comes on to sing a jingle, “Wayfair, you have just what I need!”)

A few years ago, the states got their hopes up when Justice Anthony M. Kennedy commented in another case that the question of reconsidering the Quill decision should be taken up in a new test case.  Officials in South Dakota snatched the hint, passed a new Internet sales tax that they knew was invalid under the 1992 precedent, and that case sped its way to the Supreme Court’s docket to seek the overruling of that precedent.  Unlike many other attempts to follow up on Kennedy’s notion, this one was granted review.

It came up for a one-hour hearing Tuesday, and there was almost no way to interpret what was said from the bench to give the states much dependable hope.  From the very opening of the oral argument, Justice Sonia Sotomayor recited the lengthy list of questions that would arise if the Quill decision were to be overruled.  What would the Constitution then allow the states to do with their sales tax codes?  Who would define what gives a digital retailer enough tie to a state to subject it to the tax?   Could states make their sales tax laws retroactive, and assess for billions of dollars of past Internet sales?  Sotomayor could imagine a big wave of new lawsuits.

Soon, other Justices were seeing the same gaping holes in the law of sales taxation, and the idea of leaving the matter to Congress swiftly gained followers across the bench.  Justice Stephen H. Breyer jumped in with a list of his own questions, and argued flatly that, even though the 1992 decision was based on the Constitution, it was the kind of ruling that left Congress with wide authority to answer all the questions about where sales taxation should now be allowed to go.

Justice Samuel A. Alito, Jr., wondered whether it would be better to overrule the Quill decision, allowing the states to do whatever they wished, or to let Congress work out all the problems.  When South Dakota’s lawyer replied that Congress has had a quarter-century to take some action, and has not done so, Justice Elena Kagan said that just might be because the lawmakers didn’t think there was a problem that needing solving.   Breyer chimed in that all 50 states could use their influence to lobby Congress to sort it all out.

Justice Ruth Baker Ginsburg, who at a couple of points suggested that if the 1992 decision had turned out to be wrong, the Court should correct the mistake itself, later joined in the suggestions of others that Congress had the capacity to set some standards to guide the states on how to deal with the burgeoning of the Internet marketplace.

As a policy matter, the idea of exempting online sales from sales taxes outside of the jurisdiction of the seller was justified in the early days of the Internet by the argument that it was necessary in order to help this area of the economy develop. That argument may have made sense twenty years ago, but it doesn’t make sense today. Amazon, one of the primary initial beneficiaries from the exemption, is now one of the largest and most successful companies in the world, has a physical presence in nearly every state in the Union, and hardly seems to need the protection of an exemption from collecting sales taxes. Additionally, some entrepreneurs have already made progress in the area suggested by Justice Ginsburg in the article quoted above by developing software that can track and even assist in the payment of sales taxes in almost every jurisdiction in the country that has such laws. Given this, the arguments in favor of the exemption are largely disappearing regardless of what the courts or Congress do in this matter.

In its decision in the Quill case, the Supreme Court did note that the exemption could be ended by Congressional legislation. Toward that end, there have been several efforts in the past several years to pass legislation that would mandate the collection of sales taxes by out of state businesses, although those efforts have not succeeded in any measure passing either chamber of Congress. In order to address the objections of smaller retailers who lack the resources of large businesses such as Amazon, those bills have included provisions that provide that the obligation to collect sales taxes would only kick in when a business had made sales above a certain dollar amount to a specific state. This would protect small businesses that have only limited sales in a state in which they have no physical presence from the financial burden to account for the sales tax laws of states and localities that they have no connection to beyond shipping something to a customer who happens to be located there. That seems like a reasonable accommodation to both the interests of the states that collect sales taxes and small businesses that may not be able to track the sales tax rates in all the jurisdictions it may ship to at one time or another.

In any case, we shouldn’t expect a decision in this case until the end of the Court’s term in June. In the meantime, if you’re interested in reading the pleadings that were filed in this case you can find them at the SCOTUSBlog case information page for South Dakota v. Wayfair, Inc. et al.

Here’s the transcript of the oral argument:

South Dakota v. Wayfair Inc. Et Al by Doug Mataconis on Scribd


FILED UNDER: Congress, Economics and Business, Law and the Courts, Supreme Court, Taxes, US Politics, , ,
Doug Mataconis
About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May 2010. Before joining OTB, he wrote at Below The BeltwayThe Liberty Papers, and United Liberty Follow Doug on Twitter | Facebook


  1. James Joyner says:

    I had tabbed this for blogging later if you didn’t get to it. What confounded me was this:

    Several justices expressed concerns about imposing crushing burdens on small businesses that sell goods on the internet and about making them liable for back taxes.

    Like Justice Roberts, that strikes me as profoundly not a matter for the Judicial branch of government. That’s a matter of policy. Quill, whether it was rightly or wrongly decided, was a matter of Constitutional interpretation—whether the several states have the power to tax entities without a physical presence in their jurisdiction.


  2. Kathy says:

    Here’s what I don’t get:

    Mail and catalog sales from out of state companies are over 150 years old. Why weren’t internet sales regulated in the same way from the start? the principle seems to be the same.


  3. @Kathy:

    They are “regulated the same way.” The Court had previously ruled that catalog sales can’t be subject to sales tax if the business does not have an in-state presence in the taxing state. Quill essentially applies that same rule to online sales.


  4. @James Joyner:

    I largely agree that the impact of a ruling is a policy matter that should be outside the consideration of a Judge when ruling on the validity or interpretation of a statute.


  5. Kathy says:

    @Doug Mataconis:

    I take it that doesn’t settle it, as the matter is before the Court again.


  6. James Joyner says:

    @Kathy: The problem is that neither catalogs nor early Internet sales had anything like the impact that modern e-commerce has. While Amazon has largely been self-correcting (they decided they needed physical infrastructure practically everywhere to offer high-enough-speed delivery) others haven’t. With so many of us buying so much of our stuff online, states are scrambling to replace lost revenue.


  7. Daryl's other brother Darryl says:

    This is exactly what President Dennison was bitching about with Amazon…that because they don’t pay state taxes they are putting local mom and pops out of business.
    Of course Dennison is lying…or has his tweets should be labeled, fake news…the fact is that Amazon actually does pay taxes in all 46 states where sales tax exists, plus the District.
    Dennison’s own mail order business only pays taxes in 3 states.

    This, to me, seems like a prime case of don’t fix what ain’t broken…let Quill stand.


  8. Kathy says:

    @Daryl’s other brother Darryl:

    Of course Dennison is lying…

    That goes without saying. It’s why so many people go Procopius on him.


  9. Andre Kenji de Sousa says:

    Many e-commerce companies in Brazil complains about having to deal with different tax rates and bureaucratic issues in 27 states(And there is a National Sales Tax and only Federal Law can ban the sale of certain items). Imagine doing that in 50 states where many of them does not even have a Sales Tax, and where states can regulate the sale of all kinds of products(From the Emission Standards of California to the Dry counties in the South).


  10. KM says:

    @James Joyner:

    Agree that this is policy thus a matter for Congress. The size of impact doesn’t negate the previous decision’s logic. If something is getting too big for it’s britches, it needs regulation. The simple work around is to require that companies that do X amount of sales in a state over the course of X years must have a physical presence in the state. It’s not necessarily an undue burden either since to get that large, one could easily afford to pay some schmuck in all 50 states a pittance to qualify. That leaves the small guys alone and makes the giants like Amazon, Walmart, etc pay a fair shake.

    The Court needs to let Quill stand and kick this one right back to Congress where it belongs.


  11. @James Joyner:

    The real problem lies not with big businesses like Amazon, but with smaller operations and with people who may have set up an e-commerce site on their website that can be accessed by anyone anywhere in the country, or indeed the world. For these smaller retailers, the cost of trying to keep track of sales tax rates from the jurisdictions at the state, county, and local level across the country that charge them can be quite excessive. One solution that recent Congressional legislation has proposed has been to set a limit of around $1,000,000 in out-of-state sales. Sellers who don’t meet this mark would not be required to collect sales tax. It’s an arbitrary number, but it seems reasonable. Of course, this isn’t a solution a Court has the jurisdiction or power to impose. Only Congress can do that.


  12. @KM:

    The Court needs to let Quill stand and kick this one right back to Congress where it belongs.

    Quill is largely based on Constitutional interpretation, which is perfectly within the Court’s purview, I see no reason why they ought to defer to Congress. The point about Quill, and whatever ruling that comes in this case is that because of the way the Commerce Clause works, Congress could easily overturn Quill, or however, the court rules in this case, via legislation pursuant to its powers under Article I, Section 8 of the Constitution.


  13. Gustopher says:

    For years, Amazon was complaining that calculating sales tax among the 50 different states, and countless counties and other taxing jurisdictions would be impossibly hard… all while doing that exact thing for the 3rd party merchants on their site.

    It’s not a large technical challenge, it’s just a nuisance. And it’s a nuisance that someone will happily handle as a service for any companies that cannot do it themselves (for a small fee).

    I don’t know the legal arguments, but collecting and remitting the sales taxes is not a significant burden.

    And, policy-wise, it makes sense to not favor out of state internet purchases over local businesses. If the court doesn’t act, congress should.


  14. Kathy says:

    @Doug Mataconis:

    One solution that recent Congressional legislation has proposed has been to set a limit of around $1,000,000 in out-of-state sales. Sellers who don’t meet this mark would not be required to collect sales tax.

    That does strike me as reasonable.

    The catch is that states can, and will, complain they are essentially forced to give tax breaks to small sellers out of state.

    But if they are out of state, they shouldn’t be paying another state’s sales tax, right?

    Bottom line, for me, is that a tax break to small business ought to be encouraged.


  15. Dave Schuler says:

    I wish the NYT article were a bit more explicit in their reporting. For example, this

    Several justices expressed concerns about imposing crushing burdens on small businesses that sell goods on the internet and about making them liable for back taxes.

    is not reflected in the SCOTUSBlog’s reporting on the oral arguments. The NYT implies without saying it that Justice Sotomayor expressed such concerns but that isn’t reflected in SCOTUSBlog’s reporting. For all we know it may that the the Times has such concerns which it’s attributing to the Justices. We just don’t know.

    These deliberations aren’t an opinion poll with thousands of people providing data. There are only nine justices. The least that could be done is cite actual justices.

    In other words we don’t really know whether the concerns expressed by James in his first comment are real ones or not. The reporting doesn’t support it.


  16. Tyrell says:

    “catalog sales ….did not have impact”: I would think that the catalog sales of Sears-Roebuck, and later J.C. Penney, had a large impact on American buying habits. I remember waiting in line several times at the Sears catalog stores. Those became part of American culture.


  17. Just 'nutha ig'nint cracker says:

    While it would be nice if Congress would decide this issue, Congress has discovered that it is far better (and more efficient for Congress anyway to allow these issues to go to the courts and then complain about courts usurping legislative authority. It also became a theme during the Obama administration where Congress would do nothing but would also complain about abuse of Presidential powers. Neat trick. When are voters going to get fed up with it? I don’t see that happening. Evah!


  18. Jc says:

    Problem if you set a limit of say $1MM is that is great for small business, but what about medium biz? You could trigger a registration overload in backwards states that already suck at tax registration and collection. It will affect a lot of businesses. Also does this lead to a change in income tax nexus and business presence where you have to register as a foreign Corp as well? Just opens up more stuff


  19. Jc says:

    I think 20-25MM is more appropriate. The main reason this has come up is because of mega online stores. And online sales are going to continue to grow.


  20. Mike Schilling says:

    @Doug Mataconis:

    For these smaller retailers, the cost of trying to keep track of sales tax rates from the jurisdictions at the state, county, and local level across the country that charge them can be quite excessive.

    Honestly, an app to convert sales total + zip code to tax owed would be created as soon as there was a need for it and might cost about $25.00.