Why no one can predict the Supreme Court's ruling on online sales taxes

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WASHINGTON – Some state and local government officials are cautiously optimistic the Supreme Court will rule in their favor in the South Dakota e-commerce sales tax case after hearing oral arguments Tuesday, while others are withholding a prediction.

The case involves as much as $100 billion in state and local sales tax revenue over the next decade, according the e-commerce retailers that are defendants in the lawsuit.

A ruling in favor of state and local governments “is not a slam dunk,” Emily Swenson Brock, director of the federal liaison center at the Government Finance Officers Association, said Wednesday.

Lisa Soronen, executive director of the State and Local Legal Center who listened to the oral arguments from the attorneys' lounge in the courthouse, said she’s confident “we have four pretty solid votes” siding with South Dakota.

“In order to have some sort of win, all the states need is one more vote,” said Soronen, adding that she's uncertain who among the remaining five might provide the additional vote needed for a majority.

David Parkhurst, general counsel for the National Governors Association, said it would be “foolish to predict how the court will rule” except that he believes the decision will be a close vote.

“Look at what Justice [Stephen] Breyer said,” Parkhurst said, referring to a comment the justice made during Tuesday's oral arguments. “He read the briefs on both sides and thought each was right.”

"I think it was a really robust discussion by the justices on both sides,” said Parkhurst, who was in the courtroom and later read the transcript. “It was a very engaged court that you could tell was struggling with overturning Quill.”

The high court is being asked to overturn its 1992 ruling in Quill Corp. v. North Dakota that upheld earlier rulings that were made in regard to purchases from out-of-state catalog retailers before the internet marketplace existed. Those rulings said retailers could be forced to collect sales tax only if they have a physical presence in the state or locality.

South Dakota, which has no state income tax, is appealing a state court ruling in favor of e-commerce retailers Wayfair, Overstock.com and Newegg. The state court invalidated a 2016 state law that requires e-commerce retailers to collect sales tax on behalf of the state if they had more than 200 transactions annually or $100,000 in sales.

Overturning Quill would require the court to use some sort of an economic nexus standard as a replacement.

Soronen counts Justices Clarence Thomas, Ruth Bader Ginsburg, Anthony Kennedy and Neil Gorsuch as four solid votes to overturning Quill.

Based on the questions asked by the justices Tuesday, Soronen said Chief Justice John Roberts and Justice Samuel Alito appeared to be searching for an appropriate threshold for an economic nexus.

She also counts Justice Elena Kagan and Stephen Breyer as possible yes votes, but not Justice Sonia Sotomayor.

Sotomayor expressed a clear preference for allowing Congress to resolve the issue.

“A common theme in Justice Sotomayor's questions examined the role of the SCOTUS versus Congress to approach this question,” Brock said. “Congress, she argued, would be able to craft a more complicated solution than the court can.”

Both sides in the case agree that legislative action by Congress is preferred, but political gridlock has prevented lawmakers in the House from bringing a bill to the floor.

“We’re working with Congress to do something and we’ve supported a number of bills,” Jonathan Johnson, a member of the Overstock.com board of directors, said in an interview outside the Supreme Court on Tuesday.

Johnson hopes the court upholds Quill because it would force Congress to act. “This is a legislative issue not to be solved by the court,” he said.

South Dakota Attorney General Marty Jackley told reporters outside the Supreme Court, “What I told the court was, Congress has had 26 years to fix this problem.”

“And it’s ultimately the Quill decision that’s striking down every state statute, including South Dakota’s, no matter how reasonable it is, no matter how nondiscriminatory it is, and I just simply asked this court to not leave it up to Congress,” Jackley said. “It’s too important.”

Soronen said among the options for the justices if they choose to use an economic nexus standard is to use the benchmark set by South Dakota or to say that even one transaction qualifies.

“Most states are fine with the South Dakota approach,” Soronen said. “If you are a really small business, we’ll give you a break. They know these really small entities won’t collect sales tax and it’s hard to audit everyone.”

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E-Commerce Government finance SCOTUS GFOA Washington DC South Dakota