…and No Help from Trump!
South Dakota Attorney General Marty Jackley went before the United States Supreme Court yesterday to argue the case for allowing our state to require Internet sellers in other states to collect South Dakota sales tax on purchases by our residents. The Justices responded skeptically to Jackley’s argument… and the Trump Administration lawyer who supposedly came to support Jackley’s argument may have sunk it.
As we can see from the official transcript of the one-hour argument of South Dakota v. Wayfair, Jackley got two sentences into his well-prepared argument before Justice Sonia Sotomayor started grilling him. Jackley opened by saying that Quill v. North Dakota, the 1992 case we are trying to overturn that says a business must have some physical presence in a state (retail store, warehouse, employees) to be subject to sales-tax-collection requirements, creates an “unlevel playing field” that gives “out-of-state remote sellers… a price advantage.” Justice Sotomayor said Quill doesn’t stop South Dakota from collecting sales tax; we have simply declined to come up with “a mechanism to collect from consumers.” When Jackley tried to steer back to a defense of South Dakota’s law as a fair tax-collection scheme, Sotomayor said, “I’m not concerned about your scheme as such”; she’s concerned about all the lawsuits that “the many unanswered questions that overturning precedent will create….”
The principle of letting precedent stand, stare decisis, was prominently on the minds of other justices. While Jackley argued that Congressional inaction was a good reason to overturn the 1992 decision, Justice Elena Kagan said 26 years of Congressional inaction was an additional reason to leave things alone:
But, General, usually, when somebody says something like that, that Congress has not addressed an issue for 25-plus years, you know, it — it gives us reason to pause, because Congress could have addressed the issue and Congress chose not to [Kagan, p. 10].
Justice Stephen Breyer said [p. 12] overturning precedent makes sense when Congress can act, but in this case, Congress can act. He noted a brief from members of Congress that said Congress was about to act but decided to wait to see how this very case played out. Chief Justice John Roberts said, “…it would be very strange for us to tell Congress it ought to do something in any particular area” [p. 42].
Justice Sotomayor expressed concern about the complications of complying with South Dakota’s law. What if the tax lookup software breaks down, she asked. She swept aside Jackley’s contention that compliance software costs as little as $12 a month:
That doesn’t include auditing. It doesn’t include integrating the program with the existing sales program of the company. It doesn’t account for the maintenance of the program.
There’s lots of costs that are inherent in a process of this type [Sotomayor, p. 7].
Online retailers’ lawyer George S. Isaacson concurred, noting that compliance isn’t as simple as making a spreadsheet with the sales tax rate for every state and taxing subdistrict. Vendors have to deal with differing tax rates for different product categorizations—one state might tax a booze-laced cupcake as food, while another state might tax it as alcohol. Vendors have to identify exempt products, exempt uses, and exempt users. Such categorizations are not spreadsheet-friendly.
Jackley contended that many companies are already overcoming these problems and collecting sales tax for other states, including Systemax, a company that originally was a defendant in this case but then bailed out and complied with South Dakota’s law. But Chief Justice Roberts took those examples as another sign that the Court need not act:
…the suggestion in some of the briefs is that this is a problem that has peaked in the sense that the — the bigger e-commerce companies find themselves with physical presence in — in all 50 states. So they’re already covered. And the work-arounds that some of the states have employed are also bringing more in.
And if it is, in fact, a problem that is diminishing rather than expanding, why doesn’t that suggest that there are greater significance to the arguments that we should leave Quill in place? [Roberts, p. 17]
The Court seemed particularly concerned about the practical impact of reversing Quill on small businesses. Here is where the Trump Administration’s lawyer, Deputy Solicitor General Malcolm L. Stewart, stepped all over Jackley’s argument. When Justice Roberts asked if the Court could protect “any micro-business” from other states’ sales tax collection demands based on the greater burden a small business faces compared to Amazon in complying, Stewart said no:
the answer that is most consistent with this Court’s—the body of this Court’s dormant Commerce Clause jurisprudence is there’s no constitutional minimum, that if you have an out-of-state retailer who is deliberately selling a particular physical good within the state, shipping the good into the state for delivery to the customer and transfer of title, that that is a sufficient basis for subjecting that retailer to the tax collection obligation in the same way that if that single good turned out to be defective, the state could be subject to the—I’m sorry, the retailer could be subject to regulatory burdens imposed by the state… [Stewart, p. 22].
Justice Ginsburg asked if Congress could establish some minimum for compliance by law. Stewart said sure, but Justice Kagan said that response only reinforced the idea that the Court should stay out of the matter and let Congress act. And Stewart agreed:
I would certainly agree that Congress has a broader range of options available to it than does the Court and an ability to devise more nuanced solutions [Stewart, p. 24].
While Jackley noted that South Dakota’s law includes protection for small retailers, exempting online vendors with less than $100K in sales or fewer than 200 transactions in South Dakota, Justice Samuel Alito asked if other states and municipalities in tough financial shape wouldn’t try “to grab everything the possibly can?” And again, Stewart agreed with a point that kills South Dakota’s argument:
And, certainly, if the Court issued a decision that said physical presence is no — that adopted our — kind of our view of the correct answer that said you sell — you make one sale into the state, you are obligated to collect the sales tax. I have no doubt that if the Court issued that ruling, many states would adopt regimes that are less hospitable to retailers, unless they were stopped from doing that by Congress [Stewart, p. 27].
The courtroom artist didn’t capture this in his watercolors, but I have to imagine Jackley at the table gritting his teeth and thinking, Whose side are you on, man?!
The Trump Administration’s “assistance” yesterday seemed only to reinforce the hesitation many justices expressed about embracing South Dakota’ argument for Internet sales tax. The Court has strong concerns about overturning precedent and creating undue burdens on small businesses when Congress is capable of crafting better solutions. The oral argument of South Dakota v. Wayfair only emphasized the irony of conservative South Dakota pushing a conservative Supreme Court to engage in judicial activism, overturn stare decisis, and allow states to collect more taxes from entities outside their borders.