The Court will sit for oral argument again this coming week. South Dakota v. Wayfair, to be argued on Tuesday, is perhaps the most far-reaching of the cases to be heard, although at first glance it may look esoteric — covering such issues as state sales taxes, the dormant commerce clause and stare decisis, the doctrine that once an issue has been decided, it is not revisited absent compelling reasons. But Wayfair has significant implications both for cash-strapped states and for the internet economy. In this case, South Dakota asks the Court to overrule, or at least significantly limit, its 1992 ruling in Quill Corp. v. North Dakota. Quill held that a state could not force out-of-state mail-order catalog retailers to collect sales taxes on items sold to purchasers within that state. Quill thus established a physical presence rule, prohibiting states from levying sales taxes against companies that sell goods in their state unless they have a physical presence in the state.
In the years since, 1992, of course, the internet economy has boomed, and indeed, Wayfair is an on-line retailer.. In Digital Marketing Association v. Brohl, Justice Kennedy, who was one of five justices in the majority in Quill referenced the problems many states face when they are unable to tax these companies for their sales of goods under the physical presence doctrine: “[s]tates’ education systems, health care services, and infrastructure is weakened as a result.”
The state of South Dakota argues that the changing nature of the internet prompts a reevaluation of the doctrine. In today’s ever-changing technology enables “out-of-state sellers to reach consumers with engaging, interactive virtual storefronts in our homes or on our smartphones at any hour of the day.” On the othger hand, Wayfair and other retailers argue that the decision is best left up to Congress to decide whether states have the power to expand their taxing authority beyond the confines of their borders.
Commentators also disagree. CNBC Commentator Jessica Melugin, for example, says that ruling for South Dakota would allow state legislators to obtain revenue from out-of-state businesses that lack political and economic power in their particular states. Elie Mystal of Above the Law, on the other hand, argues that the physical presence doctrine is outdated in the internet age.
Two other cases to be argued next week, both on Monday, involve issues of statutory interpretation. In Wisconsin Central Ltd. v. United States, the issue is whether, under the Railroad Retirement Tax Act, 26 U.S.C. § 3231(e)(1), stock that a railroad company transfers to its employees is taxable compensation, which is defined as “any form of money remuneration paid to an individual for services rendered as an employee.” For more information see the Forbes article entitled, “When Should You Exercise Your Employee Stock Options?”
On one side of the argument, the IRS argues that this “windfall” should be taxable just as any other income would be, asserting that stock is equivalent to cash, and, moreover, that holding this position would avoid creating a tax incentive that could lead to distorted employee compensation packages. The other side of the argument is that the plain-language meaning of the term “money remuneration” is cash or some other recognized medium of exchange, but not something like stock that, while it has cash value and can be exchanged for cash, is not generally considered to be a medium of exchange. The National Law Review authored an article on this specific issue and Nasdaq discusses the railroad economy in general, here.
Also on Monday, the Court will hear WesternGeco LLC v. ION Geophysical Corp. which is a patent infringement case about the interpretation of 35 U.S.C. §284, which allows damages to be awarded in a case where the plaintiff has proven patent infringement. These damages shall be “adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.” In this case, a jury awarded WesternGeco $12.5 million in royalties and $93.4 million for lost profits for profits the defendant obtained overseas. The Federal Circuit unanimously affirmed ION’s liability for infringement but reversed the lost profits award based on the presumption against extraterritoriality (for more on this presumption and how it is used by the Supreme Court, check out this Berkeley Journal of International Law article), holding that profits lost outside of the United States are unavailable as a matter of law. Check out the National Law Review for a discussion of Westerngeco and JD Supra for an analysis of the potential impact of the case.
The Court will also here argument in three other cases — one on Tuesday and two on Wednesday. See this post for previews of those cases.
ISCOTUS Fellows Zoe Arthurson-McColl, Eva Dickey, and Michael Halpin, all 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.