Back in 1992, retail was booming with new concepts and products. It was a time of great innovation with the rise of category killers, strip malls and supercenters — the internet and e-commerce was barely a glimmer in the horizon.

But the first crack in a fissure that would later deeply divide the industry was forming — with brick-and-mortar retailers and U.S. states on one side, and e-commerce and marketplace companies on the other.

In 1992, The Supreme Court of The United States set a crucial precedent by upholding Quill Corp. v. North Dakota — a decision that to this day only requires companies to collect and remit sales tax in states where they have a physical presence — like stores, warehouses or fulfillment centers.

But then 1995 happened and Netscape went public. That year also gave rise to corporate giants Google and Amazon, and life in retail as we knew it went out the window. Suddenly dot com companies were popping up left and right. Eventually, this enabling of remote merchants to conduct business in states without collecting state sales tax began taking a bigger toll on local municipalities. 

Today, states may be losing between $8.5-$13 billion in annual uncollected taxes, according to a report published in November by the U.S. Government Accountability Office. While many proponents of Quill argue those numbers are inflated, some parties concede that states and businesses alike need new clarity on the 25-year-old rule given the seismic effect e-commerce has had on the industry and economy as a whole. But many also argue that Quill is still relevant today.

After years of fruitless lobbying in Congress, interested parties began fighting the battle state by state. This week, SCOTUS will hear oral arguments in one such case: South Dakota v. Wayfair.

Whether online sellers collect sales tax or not may not seem like a big deal considering e-commerce still makes up less than 10% of all retail sales, but with the ever-increasing rise of new online businesses, marketplaces and cross-border digital commerce, it's one that's earned the attention of the highest court in the land. As SCOTUS begins to hear arguments for a case likely to be decided in June, Retail Dive took a look at some of the biggest points raised and what it all could mean for retailers and e-tailers alike.

The arguments in 30-seconds

In short, South Dakota proposes striking the Quill physical presence precedent in favor of an economic one that would instead require state sales tax collection and remittance if an online seller does more than $100,000 worth of business or processes more than 200 transactions in the state.

South Dakota argues that ultimately the lingering effects of the Quill decision have become outdated, and because Congress has not acted on the issue in 25 years, it's a crucial matter for the court. In a brief filed to SCOTUS, the state argues four main points:

• An economic standard would be easier to administer and more likely to promote economic activity.
• The South Dakota case serves Quill's goals better than the physical presence rule considering the companies involved in this case differ greatly from catalog retailers involved in the 1992 case.
• The practical difficulties of collecting taxes state-by-state have disappeared thanks to technology and solutions providers.
• Repealing the physical presence rule would not raise problems of retroactive taxation.

On the other side, Wayfair claims South Dakota's argument doesn't meet the "special justification" required to strip the precedent, and further that forcing companies to implement software to calculate taxes across some 12,000 nationwide taxing jurisdictions is extremely expensive, burdensome — and potentially life threatening to some businesses.

There is also concern that states could enforce retroactive taxes potentially dating back to Quill. Ultimately, Wayfair argues that the court should uphold Quill and that Congress should take action to make any necessary clarifications in the tax collection process.

The states perspective

"Leveling the playing field" is a key phrase that rings on both sides of the argument. For brick-and-mortar retailers, it's the reason the court should overturn Quill, so that all retailers that have a significant economic presence in a state — regardless of their main sales channel — pay state sales taxes. As it stands now, the difference comes down to what the price looks like to the consumer. If they can just as easily order something online and not pay sales tax on it, why wouldn't they?

"With the increase in online retail that has meant a real disparity about what the price of products looks like to consumers at the point of sale," said Deborah White, senior executive vice president and general counsel at the Retail Industry Leaders Association and president of the Retail Litigation Center. White's group was one of many to file a brief to the court urging the justices to overturn Quill. White, herself, has been working on the issue for decades both in South Dakota as well as other states, like Colorado in the 2015 case of Direct Marketing Association v. Brohl.

At the crux of the new brief, which was also signed by 21 retail and wholesale distribution trade associations, including RILA and the National Retail Federation, is the idea that the rise of e-commerce was unforeseeable at the time of the Quill ruling. In the modern market, collecting and remitting sales tax isn't a "crippling burden," according to the brief, which cites the expansion of Amazon and Walmart.com as examples. Collecting sales tax wouldn't be make or break for a big company like Wayfair, which collects sales tax in 22 states, the brief notes.

---

"It's a little disingenuous for a retailer like Wayfair to say it's too complicated for them to calculate the taxes that were owed when it would depend on individual retailers to do that if Wayfair didn't do it for them."

Deborah White

President, Retail Litigation Center

---

"In today's world of e-commerce where there are 30 or more plug and play options for collecting sales tax that can be added to online shopping cart widget on your website in a matter of minutes. It's really not a big deal for online retailers to do that, particularly retailers of this size," White told Retail Dive. "In fact, it's a little disingenuous for a retailer like Wayfair to say it's too complicated for them to calculate the taxes that were owed when it would depend on individual retailers to do that if Wayfair didn't do it for them."

Led by Colorado, some 40 states argue in a separate brief that Quill's physical presence rule causes "serious continuing injustices" for states. Putting the burden on retailers to collect and remit the tax, as opposed to enforcing use taxes (where the consumer is held responsible for issuing the correct amount of tax) bumps compliance up to nearly 100%, according to the brief. Forty five states and the District of Columbia have these kinds of sales tax levies.

In 2012, it's estimated that Alabama lost $170 million in e-commerce transactions, while Colorado lost $170 million and New York lost $865 million, the states say.

Many supporters of South Dakota cite Justice Anthony Kennedy's concurring opinion in the Direct Marketing Ass'n v. Brohl case in Colorado. "Given ... changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court’s holding in Quill. A case questionable even when decided, Quill now harms States to a degree far greater than could have been anticipated earlier."

Going one step further, Kennedy urged the legal community to present SCOTUS with a case that would allow it to reevaluate Quill and National Bellas Hess v. Department of Revenue (the 1967 ruling used as a precedent for Quill). Many take that as a sign that the court will have something new to say about Quill.

The e-commerce perspective

If you ask e-commerce companies and trade groups, they'll tell you that Quill in fact is already leveling that field, and overturning it could have potentially dire consequences to online businesses. While Wayfair and Newegg declined to comment for this story, Jonathan Johnson, president of Medici Ventures (a subsidiary of Overstock) and employee of Overstock since 2002, shed light on how a decision either way could affect the company.

Overstock, born out of the dot com boom in 1999, has been deeply involved in the issue across states and in Congress for nearly two decades. Today, the company has a physical presence in just six states, Johnson said, where it collects and remits sales tax using a software solution.

"When we went from collecting just in Utah to collecting in Utah and North Carolina, my recollection is the cost to implement what we did there was something like $1.2 million," he said. "Now given that that's in place, it would not be that much for every other state. But there is a time and effort cost, and some dollar cost, so it's [the reason] why we would like Congress to act and provide for an effective date sometime in the future — so that states are simplifying their regulations and companies have time to properly prepare for this." The alternative is to have SCOTUS issue an opinion and create chaos, said Johnson, leaving companies to wonder, "Do we have to collect today? On back taxes?" 

---

"Think about the chaos that would ensue if in fact Quill were to disappear. It is not just 12,000 state and local jurisdictions. There's also 550 Indian tribes who would assert any business anywhere in the country owes them sales tax for sales made to resident of that jurisdiction."

Steve DelBianco

 NetChoice, executive director

---

If SCOTUS ultimately overturns Quill, Overstock is better equipped than many smaller companies to handle the potential costs of collecting sales tax, Johnson admits. The company has over 2,000 employees and reported a total net revenue of $1.7 billion in 2017, according to its most recent 10K filing. Meanwhile, last year Wayfair earned revenue of $4.7 billion and Newegg landed on Forbes' list of largest private companies with $2.6 billion in annual revenue.

"It would not be flipping a light switch though, it would be hard to do [the] day of a decision being issued and read … We would either hire more people or take people from other projects and prioritize to this for a time," Johnson said. "It would be disruptive."

For smaller retailers and marketplace sellers "disruptive" might not begin to cover it. To Paul Rafelson, Pace University law professor and co-founder of the newly formed trade association Online Merchants Guild, the debate represents an "existential crisis."

"There's so much of the community that is not going to be around, and I don't think people realize that, in six months, maybe a year when the full force of what is happening is realized," he told Retail Dive. Rafelson and the members of his association are concerned about a tangential problem that SCOTUS may or may not weigh in on: What does a decision mean for marketplace sellers? Should marketplaces collect state sales tax on behalf of third party sellers?

At least one Amazon third party merchant, Flipper, filed a brief to SCOTUS. The problem for that company and others that use Fulfilled By Amazon is that they aren't notified when inventory is shifted to various warehouses, and it could cross state lines without them even knowing. That means they could be on the hook for state sales taxes without knowing it.

Overstock is a member of trade association Netchoice, which has also been highly involved in the debate. Steve DelBianco, NetChoice executive director, told Retail Dive that his association has sued seven states on the matter for "harassing remote businesses." He strongly believes Quill should be upheld.

"Think about the chaos that would ensue if in fact Quill were to disappear. It is not just 12,000 state and local jurisdictions. There's also 550 Indian tribes who would assert any business anywhere in the country owes them sales tax for sales made to residents of that jurisdiction." Even if states provide e-tailers with free software, DelBianco argues it's "free like a puppy is free." Many retailers may not be able to front the cost of integration, which would require they map their products to all sales tax jurisdictions.

---

"We believe the problem is largely self-correcting, but nonetheless we realize that is not the perception of states and municipalities that believe they are losing significant dollars."

Hamilton Davison

American Catalog Mailers Association, founder

---

Hamilton Davison, founder of the American Catalog Mailers Association, is sympathetic to the "perceived loss of sales tax revenue," but he believes states are inflating the numbers.

"We believe the problem is largely self-correcting, but nonetheless we realize that is not the perception of states and municipalities that believe they are losing significant dollars. Our estimate is it's less than 1% of new sales tax revenue would be created by things like the Marketplace Fairness Act and significant costs also be imposed on businesses, some of which are not equipped to deal with them," he told Retail Dive.

As opposed to Netchoice, the ACMA is less hardlined about whether its members should collect and remit sales tax. Davison said he's open to change so long as, "it's something we can implement without going out of business and that applies to everyone on the same day with the same rules."

Catalog mailers have on unique problem in all of this: About 11% of inbound orders on average across the industry come via the U.S. Postal Service with an order form and a check. "Some of our members have over 30% of their orders coming in that way," he said, adding that overriding Quill could mean those orders may have to ship a list of all taxing jurisdictions and count on consumers to do the right math. Invariably, people will pay too much or too little, he said, and the retailer would likely just eat the cost if customers paid to little or not at all.

What happens next?

Reading the minds of the nine Supreme Court justices is impossible, and both sides have presented points that they each believe will sway in their favor.

Considering the ways in which justices have weighed in on similar matters in the past, the Retail Litigation Center's White is "cautiously optimistic" the justices will rule to overturn Quill.

"Both justices Kennedy and [Neil] Gorsuch are on the record as basically saying Quill needs a fresh look. Then this falls in an area of constitutional law that has to do with the dormant commerce clause and justice [Clarence] Thomas has been very skeptical about that whole area of law in general and the Quill case in particular," she said. "So we know where three of nine are likely to be, and that is a pretty high number when you're going into the court."

Overstock's Johnson for his part believes it'll either be a landslide victory for e-commerce companies supporting Quill or a narrow margin win for the states. In either case, both sides are calling on Congress to fill in the holes and provide greater clarity where SCOTUS may not be able to on the judicial side.

Above all, what companies most want out of this case is clarity.