Photo: Diego M. Radzinschi/ALM

The U.S. Supreme Court heard oral arguments Tuesday in a case that will shape the fate of how online sales tax is collected in states across the country.

In South Dakota v. Wayfair, the court will consider whether online retailers must collect and remit sales tax in states where they do not have a physical presence, a precedent established in a 1992 Supreme Court case, Quill v. North Dakota, before e-commerce was a real consideration for many companies.

While South Dakota's attorney general argued that states are losing out on billions of dollars in revenue from the collection of sales tax, the defendants' counsel said that it would be burdensome to comply with thousands of jurisdictions' sales tax laws and the parties “would welcome simplification.”

Lee Cheng, former general counsel of defendant Newegg Inc., which along with Overstock.com Inc. is a co-defendant with Wayfair, was in attendance at the arguments Tuesday.

“I thought the oral arguments went very well for the defendants,” Cheng said in a phone call Tuesday afternoon.

Cheng thought the justices' line of questioning was promising, noting that “even the justices that seem sympathetic to the fact the world of retail has changed in the past 30 years” understood overturning Quill would still leave questions unanswered and would ultimately need to be decided by members of Congress, regardless. If the justices decided to overturn Quill, it would be an across-the-board decision, whereas Congress would have the authority to put in place some sort of threshold on how much business a company has to conduct in a state to establish a nexus, if it so chose.

Cheng pointed out that the Supreme Court's decision to hear the case is exactly what dissuaded Congress from taking action. Some lawmakers have stated they did not move forward this session with a bill that would create a uniform online sales tax law, so as not to interfere with the high court's case.

Cheng noted that Congress has had authority to draft and pass legislation on this issue for 26 years and it “consciously decided” not to.

Overstock did not respond for comment but the company issued a press release back in January stating: “… Unless Congress intercedes, under the U.S. Constitution any retailer without a physical presence in South Dakota cannot be required to collect and remit state sales tax.”

Macy's Inc. chief legal officer Elisa Garcia believes leaving Quill in place would be problematic. She was unable to attend oral arguments in Washington, D.C., but reviewed the transcript.

“The court's decision in Quill is causing an undue burden on the states and on traditional brick-and-mortar retailers that collect sales tax on their online and in-store sales,” Garcia said in an email to Corporate Counsel Tuesday evening. “The court should overturn Quill and allow the states to apply their tax laws to all retailers.”

She acknowledged that “while Congress may be better suited to craft a 'fix' to the tax issue, they have not acted and there is no indication that they will act.”

Many other retail lawyers on both sides of the argument voiced their opinions on the issue in the weeks and months leading up to the case.

The Retail Industry Leaders Association, for years, has been fighting a “decades-old loophole that allows online-only retailers to skirt collecting and remitting state sales tax,” as the trade group that represents major brick-and-mortar retailers described it in a statement Tuesday.

“Today marks a big day for America's Main Street retailers,” said Deborah White, general counsel for RILA and president of its sister organization, the Retail Litigation Center. “For too long, giant online sellers have held a distinct advantage over local brick-and-mortar stores.”

Cheng, though, believes that “Mom and Pop” brick-and-mortar stores have benefited from the rise of online selling. He gave an example of a local toy store in California that now has access to customers across the country thanks to e-commerce. He doesn't believe such a store would be able to keep up with the “burden” and “high cost” of complying with 12,000 local and state jurisdictions for tax purposes.

Online marketplace Etsy Inc. was among the individual companies to file an amicus brief in the case. On April 4, Etsy sided with Wayfair, Overstock and Newegg and expressed concern that the Supreme Court would overturn its earlier decision in Quill.

In an April 17 email to Corporate Counsel prior to the arguments, Etsy's general counsel said: “Overturning Quill would open a floodgate; thousands of inconsistent state and local tax regulations would suddenly apply to small business owners across the country. Requiring Etsy sellers and other microbusinesses to calculate, collect and remit sales tax in states where they have no physical presence will create stifling administrative burdens and thwart entrepreneurship.”

As was pointed out during Tuesday's arguments, many of the large online retailers that could be subject to collecting sales tax already do.

Amazon.com Inc., which is not a party to the case and hasn't weighed in, has changed the landscape of e-commerce. Following pushback from traditional brick-and-mortar retailers, Seattle-based Amazon began collecting sales tax in the 45 states that collect statewide sales tax last year—including the ones where it does not have a physical presence.

Amazon's general counsel David Zapolsky declined to comment on the case.

Wayfair's general counsel Enrique Colbert emailed a company statement, noting that it already collects and remits sales tax on about 80 percent of its orders per the guidance in Quill. He wrote that the global online retailer “has advocated legislative solution for many years, including support for the Marketplace Fairness Act, the Remote Transaction[s] Parity Act and the Online Sales Simplification Act.”

“In regard to the current Supreme Court case, Wayfair firmly believes a legislative solution that creates certainty and addresses the concerns of all constituencies is the best way to move forward,” Wayfair's statement read. “Win or lose at the Supreme Court, we will continue to advocate for a legislative solution and a level playing field where all retailers collect and remit sales tax on the same basis.”