Two States Generate Internet Sales Tax Cases Aimed at Supreme Court
In March 2015, U.S. Supreme Court Justice Anthony Kennedy wrote a concurring opinion for Direct Marketing Association v. Brohl stating that the “legal system should find an appropriate case for this Court to re-examine Quill.” Two lawsuits out of South Dakota and Alabama might be exactly the case Kennedy had in mind.
In Quill Corp. v. North Dakota, decided in 1992, the Supreme Court held that states could not require retailers without an in-state physical presence to collect sales taxes. Kennedy criticized Quill in Direct Marketing Association v. Brohl for many of the same reasons the State and Local Legal Center stated in its amicus brief.
Specifically, internet sales have risen astronomically since 1992 and states are unable to collect most taxes due on sales from out-of-state vendors. Congress could overturn the Quill decision but has repeatedly decided not to do so.
While a number of state legislatures have considered or passed legislation requiring remote vendors to collect sales taxes, South Dakota’s law is the first to generate a lawsuit. In late April, South Dakota filed a declaratory judgment action asking a state circuit court to declare its law constitutional. The next day, the American Catalog Mailers Association and NetChoice filed a declaratory judgment action asking for the opposite result.
Numerous features of the South Dakota law indicate it is fast-tracked for U.S. Supreme Court review. First, the law requires the circuit court to act on the state’s declaratory judgment “as expeditiously as possible.” Second, any appeal must only be made to the South Dakota Supreme Court, which must also hear the case “as expeditiously as possible.”
While the law is being litigated, South Dakota cannot require out-of-state vendors to collect sales taxes.
In June, an internet retailer filed suit against Alabama claiming its new rule that requires all retailers who sell more than $250,000 in goods annually to collect sales taxes—regardless of whether the retailer has a physical presence in the state—is unconstitutional. Alabama’s rule, which became effective on Jan. 1, 2016, was intended to contradict Quill and unsurprisingly generated a lawsuit.
The Alabama lawsuit was filed in the Alabama Tax Tribunal while the South Dakota lawsuit was filed in state court. Regardless of the venue, until one of these cases reaches the U.S. Supreme Court, the states will face an uphill battle. To rule in favor of the states, the administrative agencies or lower courts would have to abrogate Quill v. North Dakota, a step that any administrative agency or lower court would be more than reluctant to take. All administrative agencies and lower courts are required to follow rulings of the U.S. Supreme Court.
So South Dakota and Alabama will likely lose at every turn before either of the cases makes it to the U.S. Supreme Court. For U.S. Supreme Court review, four of the nine (currently eight) Supreme Court justices must agree to hear the case.
Absent judicial action, states wishing to expand their ability to impose sales and use tax obligations on remote sellers have an alternative to seeking to have Quill overturned. Under its authority to regulate commerce, Congress has the power to authorize states to collect sales taxes on sellers without a physical presence. Congress has thus far not done so, although legislation has been introduced in the 114th Congress: the Marketplace Fairness Act of 2015 (S. 698) sponsored by Sen. Michael Enzi of Wyoming and the Remote Transactions Parity Act of 2015 (H.R. 2775) sponsored by Rep. Jason Chaffetz of Utah.