Next Stop for Remote Sales Tax Collection Challenge: U.S. Supreme Court

Thursday, September 21, 2017

In 1992, the U.S. Supreme Court decision in Quill Corp. v. North Dakota stipulated that states cannot require retailers that don’t have an in-state physical presence to collect sales tax. Many years later, despite attempts to address the issue in Congress, Justice Anthony Kennedy wrote a concurring opinion in March 2015, stating that the “legal system should find an appropriate case for this court to reexamine Quill.” In the Direct Marketing Association v. Brohl case, Kennedy criticized Quill for many of the same reasons the State and Local Legal Center cited in its amicus brief. Specifically, Internet sales have risen astronomically since 1992 and states and local governments still can’t collect most taxes due on sales from out-of-state vendors. Following the Kennedy opinion, a number of state legislatures passed or considered legislation requiring remote vendors to collect sales tax. A law passed by South Dakota is the first to be ready for review by the Supreme Court.

On March 6, 2017, the South Dakota Sixth Judicial Circuit ruled that state law unconstitutional; it would have required remote retailers to collect and remit sales tax if they exceed a statutory threshold of sales into the state each year. The case, South Dakota v. Wayfair, Inc., potentially brings the decades-long debate on taxing remote sales a step closer back into the U.S. Supreme Court. When South Dakota passed the law in early 2016, it became the first state to implement a remote sales tax law, which was challenged almost immediately. Several states have since made efforts to adopt similar legislation in response to Congress’ failure action to enact remote sales tax legislation. The South Dakota Supreme Court ruled that the South Dakota law is unconstitutional because it clearly violates Quill, and “Quill remains the controlling precedent on the issue of Commerce Clause limitations on interstate collection of sales and use taxes. We are mindful of the Supreme Court’s directive to follow its precedent when it ‘has direct application in a case’ and to leave to that court ‘the prerogative of overruling its own decisions.’”

Following this predictable loss before the South Dakota Supreme Court, South Dakota is expected to ask the U.S. Supreme Court to rule that its law requiring out-of-state retailers to collect sales tax is constitutional. Doing so will require the U.S. Supreme Court to take the unusual step of overruling precedent.

A U.S. Supreme Court review is discretionary; four of the nine Supreme Court justices must agree to hear the case. If the petition for the court to hear this case is filed soon, the case will be decided by June 30, 2018.