Supreme Court Justices showed they were sensitive to the plight of small businesses during oral argument in the South Dakota vs Wayfair sales tax case on Tuesday. The state asked the High Court to overturn its 1992 "Quill" decision so that states could require out-of-state sellers to collect sales tax on items sold to their residents. Quill vs North Dakota prohibits that practice unless the seller has nexus (a physical presence) in the state.
When South Dakota Attorney General Marty J. Jackley said the state's small businesses on Main Street are being harmed because of the unlevel playing field created by Quill, where out-of-state remote sellers are given a price advantage, Justice Sotomayor challenged that premise.
"Isn't the problem not Quill but the fact that you don't have a mechanism to collect from consumers," she asked. "It's not the merchants who are playing - paying the sales tax; it's the consumer. They're collecting it for you. So find a way to collect from them."
In talking about how easy or difficult it would be for merchants when it came compliance issues, Justice Sotomayor asked, "What happens when the tax program breaks down, as it already has for the states who are using it, and merchants can't keep track of who they've sold to?"
(In an ironic bit of timing, the IRS website suffered an outage during the proceedings, making it impossible for taxpayers to remit payment via bank transfer today, the deadline for filing and paying 2017 taxes. To our mind, it highlights that there's no such thing as a simple software solution.)
Justice Sotomayor also pointed out the costs did not stop at fees for tax compliance software. "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."
Many laws have provisions that exempt small businesses, but as Justice Kagan pointed out, it's not the High Court's prerogative to craft such protections, referring to the court's "binary" decision - "you either have the Quill rule or you don't," she said.
She pointed out that Congress is capable of crafting compromises and trying to figure out how to balance the wide range of interests involved in the case.
South Dakota was clearly frustrated that Congress failed to pass legislation around the remote sales tax issue. Attorney General Jackley said Congress had had 26 years to address this issue. "And it's not Congress, but it's Quill, it's this Court's decision, that is striking down our state statutes."
But Justice Kagan said such an argument gives the Court reason to pause, because Congress could have addressed the issue and Congress chose not to.
Justice Sotomayor asked what constitutes a small business. She noted that the South Dakota law at the heart of the case had a 200 sales/year minimum (to South Dakota residents) before an out of state seller would be required to collect its sales tax. (Or $100,000 in sales).
And while that's the law in South Dakota, its Attorney General admitted that there was no minimum if Quill was overturned (so that other states could have lower minimums that would impact even lower-volume sellers), but pointed out that retailers are likewise subject to regulatory burdens imposed by states - for example, states could hold a retailer responsible for selling a single defective good to a resident.
NOTE: We have more to say about today's oral argument, stay tuned.