UPDATED: Will the Supreme Court Address States’ Power to Require that Retailers Tax Internet Sales?

UPDATED: Will the Supreme Court Address States’ Power to Require that Retailers Tax Internet Sales?

Legal Sidebari

UPDATED: Will the Supreme Court Address
States’ Power to Require that Retailers Tax
Internet Sales?
Updated January 16, 2018
UPDATE January 16, 2018: On January 12, 2018, the U.S. Supreme Court granted South Dakota's
petition to hear the case South Dakota v. Wayfair. Oral arguments have not yet been scheduled.
The original post from October 26, 2017, follows below.
On October 2, 2017, South Dakota petitioned the U.S. Supreme Court to hear a decision by its highest
state court that struck down a state law requiring that certain large retailers without a physical presence in
South Dakota collect and remit taxes on Internet sales and other remote sales made to the state’s residents.
The case, South Dakota v. Wayfair, is notable because the South Dakota law imposing the tax collection
obligations is clearly, and intentionally, unconstitutional under the U.S. Supreme Court’s holding in the
1992 case Quill v. North Dakota. The state enacted the law with the hopes of challenging Quill, with the
legislative findings explaining that the law “is necessary” in light of the “urgent need for the Supreme
Court of the United States to reconsider” Quill. South Dakota v. Wayfair is also of interest to Congress
because the case has the potential to impact the ongoing debate about whether Congress should allow
states to require that retailers collect and remit taxes on Internet sales. It remains to be seen whether the
Supreme Court will agree to hear Wayfair, but it appears likely that, with billions of potential tax revenue
at stake, other states will continue their efforts to bring this issue to the Court in the absence of
congressional action.
In Wayfair, the South Dakota Supreme Court, affirming a lower court’s decision, held that the state law
was unconstitutional under the U.S. Supreme Court’s Quill decision. In Quill, the Supreme Court relied
on the 1967 case National Bellas Hess v. Department of Revenue to hold that the dormant Commerce
Clause—an implicit restriction in the U.S. Constitution that prohibits states from unduly burdening
interstate commerce even in the absence of federal regulation—restricts states from requiring retailers to
collect and remit taxes on sales made to state residents if the retailer does not have a physical presence in
the state. In Quill, the Court determined that allowing a state to impose tax collection obligations on
retailers who do not have a physical presence in that state would impermissibly burden interstate
commerce due to the complexities these retailers would face in complying with the different rules in the
nation’s numerous taxing jurisdictions. Following the precedent established by Bellas Hess, the Quill
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Court also emphasized the benefits associated with using a bright-line standard that “firmly establishes
the boundaries of legitimate state authority to impose a duty to collect” taxes. In Wayfair, the South
Dakota Supreme Court explained that it was bound by the Quill precedent and therefore struck down the
state’s law because it applied to retailers without a physical presence.
Why would South Dakota enact a law that is so clearly in conflict with the Supreme Court’s decision in
Quill? The state enacted the law to develop litigation that could be appealed to the Court so that the state
could argue that Quill’s physical presence standard should be overturned. The state believes, as do some
commentators and other states, that Quill’s standard is outdated because technological advances have
significantly reduced the burden that retailers would face in collecting and remitting the taxes. On the
other hand, other commentators have argued that the Quill standard remains relevant and, in particular,
reduces the risk of multiple jurisdictions taxing the same sale. These commentators have also highlighted
some of the legal uncertainties that could arise when assessing the scope of the states’ authority to impose
tax obligations in the absence of Quill’s bright-line standard.
Recently, at least two Supreme Court Justices have seemingly expressed doubts about Quill. First, Justice
Kennedy addressed Quill in a concurrence he wrote for the 2015 case Direct Marketing Association
(DMA) v. Brohl. That case concerned a procedural issue in a challenge to a Colorado law requiring that
out-of-state retailers report information to Colorado and their customers about untaxed sales made to state
residents. In his concurrence in DMA, Justice Kennedy characterized Quill’s holding as “tenuous” and
“inflicting extreme harm and unfairness on the States,” raising the possibility that Quill should be
reconsidered in light of technological advances and the development of the Internet. Justice Kennedy
wrote that, Quill “should be left in place only if a powerful showing can be made that its rationale is still
correct.” The Court’s newest member, Justice Gorsuch, also recently addressed Quill while a judge on the
U.S. Court of Appeals for the Tenth Circuit (“Tenth Circuit”). In 2016, after the Supreme Court issued its
decision in DMA, the case was remanded to the Tenth Circuit. Then-Judge Gorsuch was part of the three-
judge panel who heard the case on remand. The Tenth Circuit held that the Colorado law was
constitutional even though it applies to retailers without a physical presence. The court explained that
Quill was not applicable to the case because Quill concerned tax collection requirements, while the
Colorado law imposed only reporting requirements on out-of-state entities. Then-Judge Gorsuch wrote a
concurrence in which he described Quill as “among the most contentious of all dormant commerce clause
cases” and stated that the Tenth Circuit would be required to follow Quill “whether or not we profess
confidence in the decision itself.” Some commentators have interpreted his concurrence to suggest that he
has doubts whether Quill’s physical presence standard should remain good law. While the Tenth Circuit’s
DMA decision was then appealed to the Supreme Court and the Court was asked to take the case to
overrule Quill, the Court ultimately decided not to hear the challenge to Colorado’s reporting law.
Within months of Justice Kennedy’s concurrence in Brohl, several states—including South Dakota,
Tennessee, and Alabama—enacted laws or adopted regulations in direct conflict with Quill. South
Dakota’s law is the first to be challenged and reach the Supreme Court.
For Congress, South Dakota v. Wayfair is of interest because there has long been a debate about whether
Congress should pass legislation to permit states to impose tax collection obligations on remote retailers.
Under its authority to regulate commerce, Congress has the power to authorize state action that would
otherwise violate the dormant Commerce Clause so long as the congressional act is consistent with other
provisions in the Constitution. Bills have been introduced in the 115th Congress to address this issue in
various ways: H.R. 2193 (Remote Transactions Parity Act of 2017); H.R. 2887 (No Regulation Without
Representation Act of 2017); and S. 976 (Marketplace Fairness Act of 2017). If the Supreme Court agrees
to hear Wayfair and the Court were to overturn or modify Quill’s physical presence standard, it could
affect congressional deliberations as to whether federal legislation may be warranted and, if so, what such
legislation should contain. For example, if the Court were to overturn Quill so that states were generally
authorized to impose tax collection obligations on remote retailers regardless of their physical presence in

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a state, Congress would no longer need to affirmatively act to allow states to impose such tax collection.
In such a scenario, if Congress shares concerns with those who defend Quill that an overruling could
result in burdensome or non-uniform rules for Internet sellers, Congress could choose to enact legislation
imposing limitations on such authority. For example, Congress might choose to require that states meet
simplification requirements relating to their tax collection procedures, audits, and enforcement (perhaps
similar to those found in H.R. 2193 and S. 976) or might attempt to limit the scope of the states’ tax
collection authority (such as in H.R. 2887).
One final point is that Congress’s Commerce Clause power might influence any decision by the Court
with respect to Wayfair. The fact that Congress has the power to pass legislation modifying the physical
presence standard might make it less likely that the Court would decide to hear the case or, if it does,
overturn Quill. Thus, it is possible that the Supreme Court may decide not to hear Wayfair and let Quill
stand—even if a majority of Justices might think that the physical presence standard is outdated—under
the theory that this issue is best left to Congress. Should the Court decide not to hear Wayfair, it is likely
the Court will be asked to hear cases from other states, such as Tennessee and Alabama, once those
lawsuits work their way through the judicial system. If the Supreme Court were to agree to hear Wayfair
or any of the other cases, it seems that the earliest the Court might hear such a case would be next year. If
Congress were to act in the meantime and pass legislation that modified Quill’s physical presence
standard, this action could make any such cases that directly challenge Quill moot under Article III of the
Constitution so that the Court would be without jurisdiction to hear them, although such a conclusion may
depend on the specifics of any action taken by Congress.

Author Information

Erika K. Lunder

Legislative Attorney

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LSB10020 · VERSION 3 · UPDATED