U.S. Supreme Court, Washington, D.C. (Photo: Mike Scarcella/ALM)

The U.S. Supreme Court, in a major e-commerce challenge, appeared reluctant on Tuesday to permit states to require online retailers to collect sales taxes in states where they do not have a physical presence.

The justices heard arguments in South Dakota v. Wayfair, in which South Dakota and a number of other states urge the court to overrule a 1992 decision—Quill v. North Dakota. That ruling reaffirmed the physical presence test for state sales-and-use tax collections. The states estimate that billions of dollars in potential tax revenues are at stake.

“Our states are losing massive sales tax revenues that we need for education, health care and infrastructure,” argued South Dakota Attorney General Marty Jackley. “Our small businesses on Main Street are being harmed because of the unlevel playing field created by Quill, where out-of-state remote sellers are given a price advantage.”

But “borders count,” countered Wayfair's counsel, George Isaacson of Brann & Isaacson in Lewiston, Maine. “So if there's going to be some standard that determines when is a company subject to the tax jurisdiction of a state, using the territorial limits of that state make sense.”

Here are three take-aways from the arguments:

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Let Congress deal with the issue.

Justice Samuel Alito Jr. asked Jackley for his preference between two options: Eliminate Quill and states can do whatever they want with respect to retroactive liability and a number of other problems. Or this: a congressional scheme that deals with all of the problems.

Jackley chose the first option. Congress, he said, has done nothing in the 26 years since Quill was decided to address the remote retailer-sales tax issue. But Justice Elena Kagan said, “This is a very prominent issue which Congress has been aware of for a very long time and has chosen not to do something about that. And that seems to make your bar higher to surmount, isn't it?”

Justice Stephen Breyer noted an amicus brief from House Judiciary Chairman Robert Goodlatte, R-Va., and bipartisan members of Congress who said Congress was about to act. “And, indeed, what stopped them from acting was our decision to decide this case,” he said. “You are 50 states. If you do not have the power to get Congress to do something, I don't know who would.”

As it stands now, both the states and internet retailers have incentive to seek a congressional solution, said Alito. “But if Quill is overruled, what incentives do the states have to ask for any kind of congressional legislation?”

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'The many unanswered questions.'

Justice Sonia Sotomayor dominated the early part of Jackley's argument with a series of questions about the possible fallout from overruling the physical presence test. “I'm concerned about the many unanswered questions that overturning precedents will create a massive amount of lawsuits about,” she said.

Her list of concerns included: retroactive tax liability, which some states already are doing; how much contact by a remote seller is enough to justify requiring sales tax collection and what happens if the tax program breaks down, as it has for some states, and merchants can't keep track of who received their goods.

Chief Justice John Roberts Jr. and Breyer pressed Deputy Solicitor General Malcolm Stewart on whether there was a constitutional minimum—a point or number of sales at which a remote seller would face sales tax collection. Stewart said the government doesn't think there is a minimum, any single sale would obligate the seller to collect the tax.

Breyer said he worried small business, which now finds it easy to enter the e-commerce, market, would be forced out by four or five giant retailers because of the sales tax collection barrier. Those small businesses are the “hope of preventing oligopoly,” he said.

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Equalizing, not discriminating.

Justice Ruth Bader Ginsburg told Isaacson that he and his supporters assert that asking out-of-state sellers to collect tax on goods shipped in-state discriminates against interstate commerce. But, she asked, “Why isn't that equalizing rather than discriminating? All who exploit an in-state market are subject to the in-state tax?”

Justice Neil Gorsuch, picking up on her question, asked, “Why should this court favor a particular business model that relies not on brick and mortar but on mail order?”

Isaacson said the dormant commerce clause's principal objective is the maintenance of “a single national marketplace, free and accessible to all participants.” Today, that free and open market would be “encumbered” by more than 12,000 different taxing jurisdictions in the country if Quill were overruled, he argued.

A decision is expected by the end of June.

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