April Argument Review: Part I – State Taxation of Internet Commerce

April saw several significant oral arguments, including a case that could change the rules for state taxation of internet commerce, South Dakota v. Wayfair, previewed here. In Wayfair, the state of South Dakota, with the support of forty-one other states, is asking the Court to overrule a 1992 case, Quill Corp. v. North Dakota. Quill held that the commerce clause prohibits state governments from taxing out-of-state retailers that do not have a physical presence in the state on the sale of goods.

South Dakota Attorney General, Marty J. Jackley, argued  first that under Quill, states are losing “massive sales tax revenues” needed for “education, health care, and infrastructure.” Second, he argued that the holding it hurts smaller retailers with brick-and-mortar stores who are trying to compete against the larger, national retailers with an online presence.

Justice Sotomayor asked Jackley “[h]ow much contact is enough to justify placing this obligation on an out-of-town seller?” She was also concerned about logistics, asking what would happen if a company lost track of how much it had sold in a particular state. Chief Justice Roberts pointed out that some of the larger e-commerce companies are expanding to the point that they have a physical presence in most, if not, all 50 states, arguably rendering a reversal of Quill irrelevant. Jackley responded by stating that although a few companies—principally Amazon—are expanding their physical presence, states are expected to miss out on some $100 billion in lost revenue over the next decade. Justice Kennedy, no fan of Quill, stated that “this court has made a statement of constitutional law that … has now, especially in light of the cyber age, proven incorrect.”

Arguing against a reversal of Quill, George Isaacson, representing Wayfair argued that Congress should identify the parameters of taxation across state lines. For example, he argued, “[Congress] can require standard uniform definitions of products so that food and sportswear and clothing doesn’t mean one thing in one jurisdiction ad another elsewhere. “ Similarly, Chavie Lieber of Racked.com highlights a similar argument made by those opposed to the Supreme Court overruling Quill. Such a reversal of  via the Supreme Court would “open a can of worms” as local state tax regimes restructure how they levy those new taxes. Alan Horowitz of Appellate Tax reviewed the oral argument in detail, concluding that signs pointed towards a closely divided court likely to uphold its prior precedent.

In another tax related-case, Wisconsin Central Ltd. v. United States, the issue revolved around whether stock transferred by a railroad company to an employee is taxable compensation under the Railroad Retirement Tax Act. Elizabeth Lowman of Jurist writes that during the argument Wisconsin Central argued that stock is not money as defined as a “generally accepted medium of exchange.” The government on the other hand argued that more than just cash money falls under the purview of the statute and cited other non-cash examples that are taxed for support. Daniel Hemel of SCOTUSblog similarly noted that the main focus of the justices was what is considered “money,” and what is not.

And in WesternGeco LLC v. ION Geophysical Corp., argued the same day as Wisconsin Central, the Court considered whether a domestic patent holder can be awarded foreign lost-profit damages, or if the presumption against extraterritoriality bars such recovery. In this case, the Respondent produced components parts of a patented item that, if put together in the United States, would constitute patent infringement. Instead, however, Respondent shipped the components to foreign parties to be combined and then used outside of the United States.

Petitioner argued that the presumption against extraterritoriality should not apply because the loss of foreign profits is a direct and foreseeable result of a domestic act of infringement. Justice Breyer had questions for Petitioner primarily aimed at the idea of comity – whether or not allowing foreign lost-profits damages in this case could have the effect of foreign corporations going after components manufacturers in the United States for violating foreign patents.

Addressing Justice Breyer’s concerns, the Assistant to the Solicitor General, arguing for the United States in support of the Petitioner, noted that the comity issue should not be very concerning given that similar damages are already awarded in tort, contracts, and copyright law. The United States also argued that once the infringement is established, if the patentee is able to show that such infringement is the proximate cause of the patentee’s lost profits, the patentee should be allowed to recover full compensatory damages.

Respondent argued that the presumption against extraterritoriality should bar the Petitioner from being awarded foreign lost-profit damages, because the harm (downstream loss of foreign profits once the patented device is used abroad) is too far removed from the domestic act of infringement for these damages to appropriately be awarded. Many of the Justices’ questions for the Respondent were based around the idea that applying the presumption against extraterritoriality here would prevent the patentee from being fully compensated for the patent infringement.

Check out a quick overview of the background of the case and oral arguments from Reuters. And write up of the oral arguments from patent law blog Patently-O can be found here.

ISCOTUS Fellows Matthew Webber, Chicago-Kent Class of 2019, and Eva Dickey and Michael Halpin, both Chicago-Kent Class of 2020, contributed to this post, which was edited by ISCOTUS Editorial Coordinator Anna Jirschele, Chicago-Kent Class of 2018, and overseen by ISCOTUS Co-Director and Chicago-Kent faculty member Carolyn Shapiro.

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