The U.S. Supreme Court today heard the arguments on if online retailers should collect sales tax regardless if they have a physical presence in the state. The justices seem to be divided on if they will overturn their Quill decision to allow states to start collecting sales tax from online retailers.

The future of an internet sales tax remains up in the air.

The U.S. Supreme Court on Tuesday heard the oral argument for the case South Dakota v. Wayfair Inc., et al., which will determine if the physical-presence (nexus) rule will still stand as the determining factor on if a retailer collects sales tax in a state. The Supreme Court’s decision could overturn the 26-year-old precedent, established in the Supreme Court case Quill Corp. v. North Dakota, when the court ruled that Quill, a catalog retailer, did not have to collect sales tax in North Dakota because it had no physical presence in the state.

While the Supreme Court is not expected to make a decision until June, the justices’ statements and questions during today’s oral arguments left many experts uncertain how the court will rule.

“The arguments show how close this case is,” says Hayes R. Holderness, assistant professor at University of Richmond School of Law.


Previous comments from three justices—Anthony Kennedy, Neil Gorsuch and Clarence Thomas—about Quill suggest they believe the Quill precedent does not hold up. Justice Ruth Bader Ginsburg has twice referred to the Quill precedent as “obsolete.” She said requiring online retailers to pay sales tax would equalize, not harm, small businesses.

“Anyone who wants to sell in-state, whether an in-state shop, an out-of-state shop, everybody is treated to the same tax collection obligation. All who exploit an in-state market are subject to the in-state tax,” she said.

The other justices, however, brought up a host of other factors, including:

  • The cost and burden for e-commerce merchants to collect sales tax in 12,000 jurisdictions nationwide.
  • States passing laws to collect sales tax retroactively.
  • Leaving the issue up to Congress.

“When I read your briefs, I thought absolutely right. And then I read through the other briefs, and I thought absolutely right. And you cannot both be absolutely right,” said Justice Stephen Breyer.


South Dakota urged the court to let sales taxes be imposed on any company with an “economic presence” in a state, not a “physical presence.” South Dakota’s law would require retailers with more than $100,000 in annual sales or 200 transactions in the state to pay a 4.5% tax on purchases.

South Dakota argued that the state is losing “massive sales tax revenues” needed for education, healthcare and infrastructure. Quill, it said, harms small retail businesses because out-of-state sellers, which are mostly e-commerce merchants, can offer a price advantage on their goods.

Wayfair, Overstock and Newegg argued that even if online retailers began using software to help them collect sales tax the technology would “hardly scratch the surface” of correctly implementing online sales tax because there are other functions that no software can solve, said George Isaacson, the attorney for Wayfair, Overstock and Newegg.

“Retailers need to map their products against that software, which is rife with errors because common products are defined differently in different states,” Isaacson said. “And it’s not merely the 45 states plus the District of Columbia that have sales tax, but there are over 500 home-rule jurisdictions that have their own tax bases and definitions.”


Several justices and retailers expressed concern that states want to collect sales taxes retroactively. However, that is not the case in South Dakota and, in a joint briefing, 38 other states indicated their laws would prevent retroactivity.

Meanwhile, several bills are working their way through Congress now that address online sales tax. Congress could come up with a solution that deals with the nuances of the issue, such as a minimum sales amount or standard definition of products across states. However, South Dakota points to the 26 years of Congress’s inaction as the reason why the Supreme Court should overturn Quill.

“Congress has 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,” said South Dakota Attorney General Marty Jackley.


Andy Pincus, a partner at law firm Mayer Brown, who also filed an amicus brief on behalf of marketplace eBay Inc., says it’s hard to tell which way the justices sway, based on the “many skeptical questions by many justices.”

“The expectations of many observers was this would be a cakewalk for South Dakota, and I think it certainly wasn’t,” he says.

Steve DelBianco, executive director at e-commerce advocacy group NetChoice, agrees, noting that the justices asked questions about what happens if the tax software breaks, the costs for smaller businesses to collect for 46 states and if nearly all major e-commerce companies collect sales tax, hasn’t the problem already peaked.

“Tough questions asked by the justices today reveal that the court understands this is far more complicated than South Dakota has claimed,” DelBianco says. “Overturning Quill isn’t just flipping off a switch. It would cause national chaos.”


Wayfair is No. 16 in the Internet Retailer 2017 Top 500, Amazon is No. 1, Newegg is No. 21, Etsy is No. 22 and Inc. is No. 30.

Bloomberg News and Zak Stambor contributed to this article.