Amicus Curiae Brief — South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018) (No. 17-494)

REFS NOV 1- 2017

No. 17-494

IN THE

Supreme Court of the Anited States

SOUTH DAKOTA,

Petitioner,

Vv.

WAYFPAIR, INC., OVERSTOCK.COM, INC..,

AND NEWEGG, INC..,

Respondent.

On Petition for a Writ of Certiorari

to the Supreme Court of South Dakota

BRIEF OF RETAIL LITIGATION CENTER, INC. AS

AMICUS CURIAE IN SUPPORT OF PETITIONER

DEBORAH WHITE DONALD B. VERRILLI, JR.

RETAIL LITIGATION Counsel of Record

CENTER, INC. MUNGER, TOLLES & OLSON LLP

1700 N. Moore Street, 1155 F. Street, NW, 7th Floor

Suite 2250 Washington, D.C. 20004

Arlington, VA 22209 donald. verrilli@mto.com

(202) 220-1100

MARK R. YOHALEM

MUNGER, TOLLES & OLSON LLP

355 S. Grand Ave., 35th Floor

Los Angeles, California 90071

i

CORPORATE DISCLOSURE STATEMENT

The Retail Litigation Center, Inc. (“RLC”) is a

501(c)(6) membership association that has no parent

company. No publicly held company owns a ten per-

cent or greater ownership interest in the RLC.

‘3

TABLE OF CONTENTS

Page

CORPORATE DISCLOSURE STATEMENT ............. i

INTEREST OF AMICUS CURIAE.......................0...... 1

INTRODUCTION AND SUMMARY OF THE

SARIS RET a 6 or Ee LE eT ee 3

I iri ictciinaantniicintienatieahtngebetueacipebamiaeniah 7

I. The Retail Economy Has Transformed

Since Quill, Undercutting Stare Decisis

and Underscoring the Need to

Reevaluate the Physical-Presence

EIN RS

II. Far From Promoting Stability in the

Law, the Physical-Presence

Requirement Is Generating a Welter of

Legislation and Litigation.............................. 18

Ill. The Court Should Not Expect Congress

to Correct the Constitutional Error of

Fe BN ORS CIID teieeccnseteceunssesderceessatvenendyy 23

I i a 25

TABLE OF AUTHORITIES

Page

FEDERAL CASES

American Trucking Ass‘ns, Inc. v.

a ee 25

American Trucking Ass‘ns, Inc. v.

Scheiner, 483 U.S. 266 (1987)................2--.000.-02- 7.8

Capitol Greyhound Lines v. Brice,

ee ar acct ccncisitashcthssaiieasieiiniedeniaieuneateie 25

D.H. Holmes Co. v. McNamara,

SSRI RE NEE OTN RE ARORA RES ERC! 6

Direct Marketing Ass’n v. Brohl (DMA),

as ee I icinvetsinsatsnithintescninineciones 2, 6, 23

Direct Marketing Ass’n v. Brohl (DMA

IZ), 814 F.3d 1129 (10th Cir. 2016)........ 1, 7, 19, 20

Exxon Shipping Co. v. Baker,

ee , S Ictias Soci canacepanadnenabateiienaouiiatasiedl 26

Granholm v. Heald,

I I, a i ca eat ile Raia 8

Halliburton Co. v. Erica P. John Fund,

A 26

Hughes v. Oklahoma,

gg 8 RR ES a RSE SEN EEA 5

1V

Leegin Creative Leather Prods., Inc. v.

. - & "Be 1 ele & ogg. _ ; : pens 16

Marbury v. Madison,

FO es cceedneeincaiaadianaeneniigalen 26

Nati Bellas Hess, Inc. v. Dep't of Rev. of

Pe se ee passim

Quill Corp. v. North Dakota,

I i passim

State Oil Co. v. Khan,

4 S , ee sen ania 8, 26

ARTICLES

A dozen ways Pa.’s 2017-18 state budget

may impact your life, Penn Live (Oct.

a RRR RRSP Rs ENE ne 21

A.W., The Economist explains: What

disruptive innovation means, The

rn URI I haces 16

Ben Unglesbee, Sears borrows $100M

(more) from Eddie Lampert’s hedge

fund, Retail Dive (Oct. 6, 2017).......00.000000.0000000.. 12

CEO Hubert Joly: Best Buy 2020

focused on growth, CNBC (Sept. 19,

I ah calesanibaiie 12

Vv

Clifford Stoll, Why the Web Won't Be

Nirvana, Newsweek (Feb. 25, 1995,

FID MIND cvcccctmsiccnccccecstosoreavencsenssassccsouvssonss

Corinne Ruff & Ben Unglsebee, The

running list of 2017 retail apocalypse

victims, Retail Dive (July 5, 2017)...........

Dan O’Shea, Mobile commerce to

dominate online sales by 2021, Retail

BINUS GIGS. BD, BOE Fp ecsccscccsecessecesssscccveseseoee.

Daphne Howland, Sears Holdings to

shutter another 20 stores, Retail Dive

GIO BS, BOTT) nccconcccccccccovcscsssesscesccscessseeses

Eric T. Anderson, et al., How Sales

Taxes Affect Customer and Firm

Behavior: The Role of Search on the

Internet, J. of Mktg. Research, Vol.

re @ | CeCe

Jay Yarow, Paul Krugman Responds To

All the People Throwing Around His

Old Internet Quote, Business Insider

(Dec. 30, 2013, 9:06 a.m.)..........:.ccceeceeeeeees

Julie Creswell, Buy a Sofa Online?

Wayfair Is Counting on It, New York

po eS eer

Julie Jargon, Annie Gasparro, and

Heather Haddon, For Amazon, Now

Comes the Hard Part, Wall Street

Journal (June 18, 2017, 7:07 p.m.)..........-

jntiacscumibes 4

puneesdecaui 9

snnoeniande 14

vi

Kavita Kumar, Target will remodel

more stores to compete with Amazon

and Walmart, Star Tribune (Oct 19,

I oo cintuaamentoapebenins 12

Kelly Phillips Erb, Tax Free No More:

Amazon To Begin Collecting Sales

Tax Nationwide on April 1, Forbes

(March 27, 2017, 4:22 p.m.) ....cccccceseccscoesssecesseeeeees 9

Morgan True, State sending 20,000

letters to collect alternative sales tax,

Brattleboro Reformer _— 4, 2017,

5:33 p.m.)... WE ARETE Mp LOA CETTE

Robert Spector, The Rise and Fall of

Toys “R” Us, The Robin Report (Oct.

Sy I rant diitacainicaacsdcdpeed caeheasadeantenhssnsideisbind«ses 11

Shan Li, Amazon overtakes Wal-Mart as

biggest retailer, Los Angeles Times

SE NE, Sy UY UE Ba icicctdtcscdeccesvccereesesscarsons 9

Tracy Maple, Crutchfield sues to block

Massachusetts from collecting online

sales tax, Digital Commerce 360 (Oct.

FUN CIE UE etacecceidnsinhisoasebarniesnobssscentabteenieieentesescebeeins 22

Tyler A. LeFevre, Justice in Taxation,

41 Vt. L. Rev. 763, 769-70 (2017) ....... ieemeieesetdanen 20

Valerie Bauerlein, Retail Stores Made

Elmira, N.Y., an Unlikely Success—

Now They're Gone, Wall Street

Journal (Sept. 27, 2017, 11:23 a.m.)....................11

vu

William F., Fox, Jnability to Collect

Sales Tax on Remote Sales Still

Harms the Economy, State Tax

Notes (Nov. 6, 2017, forthcoming)

INTEREST OF AMICUS CURIAE!

Amicus, the Retail Litigation Center, Inc., repre-

sents national and regional retailers. including many

of the country’s largest and most innovative retailers.

across # breadth of industries. The RLC’s members

employ millions of people throughout the United

States. provide goods and services to tens of millions

more, and account for tens of billions of dollars in an-

nual sales. The RLC offers courts retail-industry per-

spectives on important legal issues and highlights the

industry-wide consequences of significant cases.

This is just such a case. By distorting the retail

market in favor of absentee e-commerce. Natl Bellas

Hess, Inc. v. Dep't of Rev. of Ill., 386 U.S. 753 (1967),

and Quill Corp. v. North Dakota, 504 U.S. 298 (1992),

have caused palpable harm to the RLC’s members and

the communities and customers they serve. Doctrinal-

ly, Bellas Hess and Quill are eccentric outliers in this

Court's Commerce Clause jurisprudence. See Direct

Mktg. Ass'n v. Brohl (DMA It), 814 F.3d 1129, 1151

(LOth Cir. 2016) (Gorsuch, J., concurring). But practi-

! No counsel for a party authored this brief in whole or in part,

and no party or counsel for a party, or any other person other

than the RLC or its counsel, made a monetary contribution

intended to fund the preparation or submission of this brief.

On October 16, 2017, and October 19, 2017, respectively,

Petitioner and Respondents gave blanket consent to amicus

briefs. On October 31, 2017, the RLC notified the parties of its

intention to file this brief, and they again indicated their

consent.

2 The RLC’s membership is listed on its website,

www.RetailLitCenter.org.

2

cally, those decisions continue to have tremendous,

harmful effect on America’s retail industry. Indeed,

there has been a strikingly inverse relationship be-

tween the legal support for, and practical significance

of, the physical-presence requirement.

Over the past quarter century, technology has

transformed retail commerce in a way utterly unfore-

seen when Quill revisited Bellas Hess in 1992. The

word “internet” does not appear in Qui/l, which instead

focused upon the “goliath” mail-order industry, with

sales amounting to about $180 billion. 504 U.S. at 303.

Since then, the internet has changed everything. “By

2008, e-commerce sales alone totaled $3.16 trillion per

year in the United States.” Direct Mktg. Ass’n v. Brohl

(DMA), 135 S.Ct. 1124, 1135 (2015) (Kennedy, J., con-

curring). By 2015, such sales totaled $5.71 trillion.

The mail-order “goliath” has given way to an e-

commerce leviathan.

The RLC’s members have met these market forces

by incorporating technology into their businesses to

provide their customers with superior service at re-

duced costs. But no amount of ingenuity can get

around the unfair advantage that Bellas Hess and

Quill give to absentee retailers by making their online

sales appear duty-free. Thus, the RLC has a vital

interest in whether this Court grants South Dakota’s

petition.

3 William F. Fox, Inability to Collect Sales Tax on Remote Sales

Still Harms the Economy, State Tax Notes (Nov. 6, 2017,

forthcoming).

3

INTRODUCTION AND SUMMARY

OF THE ARGUMENT

This case presents an issue of pressing importance

to businesses seeking to compete fairly in interstate

commerce and States seeking to collect sales taxes

sustainably in the digital age. By giving absentee

retailers—t.e., businesses with no physical presence in

the communities in which they sell their products—

constitutional immunity from the obligation to collect

sales taxes, Bellas Hess and Quill have tremendously

distorted interstate commerce and State tax policy.

Because the lack of point-of-sale sales tax collection

makes absentee e-commerce sales appear duty-free,

customers are drawn to such transactions. And be-

cause the precondition to that duty-free status is being

physically absent, such transactions necessarily drain

money away from both the private and public sectors of

the local community. Every day that distortion grows

greater as the internet and e-commerce become more

entwined in our lives. If the Court does not act now,

Quill threatens to inflict irremediable practical harms

even as its legal and economic rationales have van-

ished.

The 50 years since Bellas Hess, and the 25 years

since Quill, have seen a transformation in retail.

When Bellas Hess was decided in 1967, it would have

been beyond imagination that Americans would use

credit cards to instantaneously buy books, clothes,

food, tools, movies, appliances, furniture, and any

other movable good via computers. Shopping malis,

bookstores, and hardware stores seemed like irremov-

able fixtures of the American landscape. Neither the

4

internet nor even its military predecessor, ARPANET,

yet existed. There was simply no way for e-commerce

to displace traditional retail.

When Quill was decided in 1992, that possibility

was still farfetched. As noted, the internet went un-

mentioned in Quill. Justice White’s partial dissent

notes sales made via “computer linkup,” but only after

sales by “wire transfers,” “fax,” and “phone,” before

concluding that “the days of the door-to-door salesper-

son are not gone.” 504 U.S. at 328. Three years after

Quill, Newsweek—still then a print publication—

scoffed at the notion that “[clommerce and business

will shift from offices and malls to networks and mo-

dems” and declared that a “local mall does more busi-

ness in an afternoon than the entire Internet handles

in a month.”4 But what seemed fantastical then is now

retail reality—the ability to “just point and click for

great deals” in “instant catalog shopping” via “a trust-

worthy way to send money over the Internet.”5

Technological innovation and creative disruption

have been at the heart of American business from the

very founding, when Alexander Hamilton strove to

bring British water mill technology to Paterson, New

Jersey. Traditional retailers, such as those that com-

pose the RLC, have adapted to, or outright adopted,

the transformative forces of the internet, e-commerce,

the supply chain revolution, and other developments

over the past 25 years. Such advances may sometimes

4 Clifford Stoll, Why the Web Won't Be Nirvana, Newsweek (Feb.

25, 1995, 7:00 p.m.), http://www.newsweek.com/clifford-stoll-

why-web-wont-be-nirvana- 185306.

5 Id.

5

destroy individual business, but on the whole they

make America’s economy stronger.

But the tax shelter provided to absentee e-

commerce retailers by the physical-presence require-

ment is something else entirely. That kind of tax dis-

tortion does not make the economy stronger; rather, it

encourages practices that make little business sense

but nevertheless confer a bottom-line advantage. (See

Pet. 18.) Quill itself recognized that “the mail-order

industry's dramatic growth over the last quarter cen-

tury is due in part to the bright-line exemption from

state taxation created in Bellas Hess.” 504 U.S. at 316.

But because stare decisis caused the Court to look

backwards to Bellas Hess, the Court could not see

ahead to just how unjustified and destructive that tax

“exemption” would become.

Twenty-five years later, it has become easier than

ever to operate as an absentee retailer: far from posing

extraordinary challenges, it is now in many ways

cheaper to sell and ship goods from afar than to do so

as a part of the local community. Of course, there

remain benefits to operating on Main Street rather

than simply on the Web. But businesses cannot strike

a sensible balance because absentee retailers are able

to hold themselves out as duty-free, giving them an

apparent discount in comparison to stores that remain

in the community. Thus, while the Commerce Clause

is meant to encourage economic integration among the

States, see Hughes v. Oklahoma, 441 U.S. 322, 325

(1979), the dormant Commerce Clause ruling in Bellas

Hess has had the perverse effect of encouraging Bal-

kanization and isolation, with companies hunkering in

a single State to avoid collecting sales taxes when they

sell their products elsewhere. The tax advantages of

6

that business form are, with ever-growing speed, driv-

ing businesses off Main Street and away from local

communities. Faced with these mounting harms,

Justice Kennedy called for “an appropriate case for this

Court to reexamine Quill and Bellas Hess.” DMA, 135

S.Ct. at 1135.

South Dakota answered that call. With South Da-

kota’s petition, the Court now has the opportunity, and

indeed the obligation, to do the same thing it did in

Quill: look back at what has happened over the past

quarter century (in Quill, 1967-1992; here, 1992-2017)

and determine whether enough has changed to revisit

the lonely precedent of Bellas Hess. The 25 years lead-

ing up to Quill eroded Bellas Hess's legal foundation.

The last 25 years have eroded its economic assump-

tions as well. Now, it is the brick-and-mortar stores

whose reliance interests should be vindicated: namely,

reliance on the commonsense notion that they would

not suffer competitive disadvantage merely for being a

physical part of the communities they serve. It is past

time to stop exempting absentee retailers from the

general Commerce Clause rule that “interstate com-

merce may be required to pay its fair share of state

taxes.” D.H. Holmes Co. v. McNamara, 486 U.S. 24, 31

(1988).

The Court should grant South Dakota's petition and

eliminate the physical-presence requirement.

7

ARGUMENT

I, THE RETAIL ECONOMY HAS

TRANSFORMED SINCE QUILL,

UNDERCUTTING STARE DECISIS AND

UNDERSCORING THE NEED TO

REEVALUATE THE PHYSICAL-

PRESENCE REQUIREMENT

As explained in South Dakota’s petition (Pet. 21-

27)—and as recognized in Quill itself, 504 U.S. at

311—the physical-presence requirement established in

Bellas Hess is inconsistent with the rest of the Court’s

Commerce Clause jurisprudence. Then-Judge Gor-

such described Quill’s increasingly eccentric and

anachronistic character in his concurrence in DMA II,

814 F.3d at 1150-51. The primary basis for retainiug

the physical-presence requirement in Quill was thus

stare decisis. But, given the changed circumstances

since Quill, stare decisis cannot justify keeping the rule

any longer, and it certainly does not justify denying

South Dakota’s petition for certiorari.

As this Court has long recognized, stare decisis -s

not an inexorable command, and when the world

changes, it is appropriate to consider whether the law

should change as well. For instance, in American

Trucking Ass‘ns, Inc. v. Scheiner, 483 U.S. 266 (1987),

the Court rejected stare decisis as a basis for hewing to

existing dormant Commerce Clause precedent. Justice

O’Connor dissented, urging that “the reliance interest

sought to be protected by the doctrine of stare decisis

ha[d] grown up around the settled rule.” Jd. at 300.

But she agreed with the majority in principle that

8

“(sjignificantly changed circumstances can make an

older rule, defensible when formulated, inappropriate,

and {this Court has] reconsidered cases in the dormant

Commerce Clause area before.” Jd. at 301-02. The

Court is particularly willing to engage in such recon-

sideration when technological changes have made prior

dormant Commerce Clause rules obsolete and counter-

productive. For instance, in Granholm v. Heald, 544

U.S. 460, 492 (2005), the Court departed from prior

precedent allowing discrimination against out-of- state

liquor sellers because “improvements in technology

have eased the burden of monitoring out-of- state win-

eries.” As the Court has explained in the antitrust

context, “{a]lthough we do not lightly assume that the

economic realities underlying earlier decisions have

changed, or that earlier judicial perceptions of those

realities were in error,” neither should the Court main-

tain “per se” bright-line rules that “remain{} forever

fixed” while the world moves on. State Oil Co. v. Khan,

§22 U.S. 3, 21 (1997) (internal citation and quotation

marks omitted).

It is hard to imagine circumstances more profoundly

changed than those of the retail economy from 1992 to

2017. When Quill was decided, less than 2% of Ameri-

cans had some form of internet access,® and Ama-

zon.com did not even exist; today, that number is about

6 The World Bank, Individuals using the Internet (% of

population), https://data.worldbank.org/indicator/

IT.NET.USER.ZS?locations=US (last visited Oct. 31, 2017).

The overwhelming majority of these few users would have been

connecting to text-only interfaces via 2400-baud modems.

9

89%,’ and Amazon.com is the single largest retailer in

the world.* Not only was this transformation unfore-

seen in Quill, it was largely unforeseeable. Indeed,

even in 1998, six years after Quill was decided, Nobel

Prize-winning economist Paul Krugman famously

declared that “[b]y 2005 or so, it will become clear that

the Internet's impact on the economy has been no

greater than the fax machine’s.”? The internet defied

predictions precisely because it was so revolutionary.

By aggregating retail offerings into a single point of

access, the internet enabled a form of online e-

commerce that is different from mail-order not only in

scale—almost $6 trillion annually for e-commerce

versus $180 billion annually for mail-order in Quill—

but also in kind. In 2010, a group of academics at MIT

and Northwestern studied the effect of exempting

absentee retailers from sales tax collection, and they

concluded that e-commerce sales work quite differently

7 United States Internet Users, http://www .internetlivestats.com

/internet-users/us/ (last visited Oct. 24, 2017).

8 Shan Li, Amazon overtakes Wal-Mart as biggest retailer, Los

Angeles Times (July 24, 2015, 1:06 p.m.).

http://www latimes.com/business/la-fi-amazon-walmart-

20150724-etory.html. This year, Amazon began collecting sales

tax nationwide irrespective of its physical presence. Kelly

Phillips Erb, Tux Free No More: Amazon To Begin Collecting

Sales Tax Nationwide on April 1, Forbes (March 27, 2017, 4:22

p.m.), https://www.forbes.com/sites/kellyphillipserb/

2017/03/27/tax-free-no-more-amazon-to-begin-collecting-sales-

tax-nationwide-on-april- 14#5bcf92414e59.

* Jay Yarow. Paul Arugman Responds To All the People

Throwing Around His Old Internet Quote, Business Insider

(Dec. 30. 2013, 9:06 a.m.), hitp://www.businessinsider.con/

paul-krugman-responds-to-internet-quote-2013-12.

10

from catalog sales. See Eric T. Anderson, et al., How

Sales Taxes Affect Customer and Firm Behavior: The

Role of Search on the Internet, J. of Mktg. Research,

Vol. 47, No. 2 (April 2010), pp. 229-239. While there

was no apparent “reaction to sales taxes in the catalog

channel,” there was a considerable benefit to the tax

exemption in e-commerce. /d. at 236. This is so, at

least in part, because of the ease of “comparison shop-

ping” on the internet. Jd. at 235-37. E-commerce thus

cannot be seen simply as an extension or expansion of

mail-order; it is something materially different, with a

far greater effect on the retail industry.

The transformation of retail wrought by the inter-

net, computers, and digital technology is in no sense

over; rather it is an ongoing, likely accelerating, pro-

cess. Internet access statistics tell only part of the

story. Even a decade ago, Americans went online

almost exclusively from their computers, but today,

almost 80% of Americans own smartphones.!° Thus,

the choice is no longer between shopping at home via a

computer and shopping in person at a store; now, the

great majority of Americans can remotely shop at any

time via smartphone apps or web browsers. Already,

“[mJobile commerce is expected to account for 34.5% of

total e-commmerce sales this year, and it’s further

anticipated to surpass 50% by 2021.'!” Other changes,

10 Mobile Fact Sheet, Pew Research Center,

http://www.pewinternet.org/fact-sheet/mobile/ (last visited Oct.

24, 2017).

1! Dan O'Shea, Mobile commerce to dominate online sales by

2021. Retail Dive (Oct. 29, 2017), https://www.retaildive.com/

news/mobile-commerce-to-dominate-online-sales-by-

202 1/508403/.

11

from virtual reality headsets to 3D printing, are also

making headway. As one retail industry commentator

noted:

The Toys “R” Us bankruptcy is another reminder

that retail is in a constant state of disruption,

which is why only those retailers that relentlessly

adapt and innovate have a chance of survival.!2

America’s traditional retailers, from the smallest

mom-and-pop store to the largest chain, have lived and

sometimes died by that dictum. While the Wall Street

Journal has written about “2017's brick and mortar

carnage,” '* it is not all a story of decline. For instance,

Target recently announced a $7 billion multi-year

investment into its team and business that involves

remodeling 1,000 stores across the country and open-

ing hundreds of new ones around a novel, smaller

floorplan.'4 Sears has opened new “concept stores,”

partnered with Amazon, and used its own “Shop Your

Way membership platform, websites and mobile apps

. to maintain [its} valued [customer] relationships

12 Robert Spector, The Rise and Fall of Toys “R” Us, The Robin

Report (Oct. 18, 2017), http://www.therobinreport.com/the-rise-

and-fall-of-toys-r-us/.

13 See Valerie Bauerlein, Retail Stores Made Elmira, N.Y., an

Unlikely Success—Now They're Gone, Wall Street Journal

(Sept. 27, 2017, 11:23 a.m.), https://www.wsj.com/article_email/

retail-stores-made-elmira-n-y-an-unlikely-successnow-theyre-

gone- 1506525802-IMyQjAxMTI3NTlyNzlyMDcOWj/.

‘4 Kavita Kumar, Target will remodel more stores to compete

with Amazon and Walmart, Star Tribune (Oct 19, 2017, 9:39

p.m.), http://www.startribune.com/target-will-remodel-more-

stores-to-compete-with-amazon-and-walmart/4516338 1 3/

12

long after a store closes its doors.”'5 Best Buy’s newly

announced plan for growth includes expanding into

new service offerings such as In-Home Advisors and

Total Tech Support.’ At the same time, online e-

commerce has spread into areas where formerly it

would have seemed impossible, such as Wayfair’s re-

cent push to sell sofas online. !”

And these stories are drawn from a mere six-week

slice of what is happening in retail.

These changes vindicate the prescient misgivings

voiced by Justice White in Quill, namely that, “in to-

day’s [1992] economy, physical presence frequently has

very little to do with a transaction a State might seek

to tax,” and that it was impossible “to attempt to justi-

fy an anachronistic notion of physical presence in eco-

nomic terms.” 504 U.S. at 328 (concurring in part and

dissenting in part). But even Justice White did not,

and could not, anticipate the degree to which “physical

presence” and “sales” would be decoupled by 2017. In

1992, the majority in Quill could still write that “the

‘6 Ben Unglesbee, Sears borrows $100M (more) from Eddie

Lampert’s hedge fund, Retail Dive (Oct. 6, 2017),

http://www.retaildive.com/news/sears-borrows- 100m-more-

from-eddie-lamperts-hedge-fund/506702/; Daphne Howland,

Sears Holdings to shutter another 20 stores, Retail Dive (June

23, 2017), http://ww w.retaiidive.com/news/sears-holdings-to-

shutter-another-20-stores/4457 10/.

16 CEO Hubert Joly: Best Buy 2020 focused on growth, CNBC

(Sept. 19, 2017, 8:34 a.m.), https://www.cnbc.com/video/2017/

09/19/ceo-hubert-joly-best-buy-2020-focused-on-growth. html.

17 Julic Creswell. Buy a Sofa Online? Wayfair Is Counting on

It, New York Times (Oct. 15, 2017), httpa://www.nytimes.com/

20 17/10/15/business/wayfair-online-furniture.htm!.

13

Bellas Hess rule appears artificial at its edges,” id. at

315 (emphasis added), whereas today it looks artificial

to its very core.

Consider, for example, that the physical-presence

requirement relies not on the location of the transac-

tion but on the location of the retailer. Thus, an identi-

cal online transaction—-buying a product on Way-

fair.com versus Walmart.com—is treated differently

not because the Walmart.com server processing the

transaction or the Walmart warehouse shipping the

good is “physically present” in the State, but simply

because some Walmart store or warehouse or office

space, possibly wholly unrelated to the transaction, is

in-state. Thus, a customer of Walmart.com has sales

taxes collected at the on-line point of sale based purely

on the coincidence of the retailer’s real estate footprint.

To the extent there is any actual physical connec-

tion between a particular online transaction and the

State, it is not the happenstantial existence of a store

somewhere within the State’s borders. Rather, it is the

fiber-optic cables transmitting the purchase request,

the concrete roads carrying the trucks that deliver the

packages, and the flesh-and-blood law enforcement

officers ensuring those packages are not stolen off a

customer's porch. Indeed, it is precisely the local “last

mile” that presents the greatest hurdle to absentee

retailers,'* a hurdle that would be insurmountable if

States and communities did not provide such solid

-_

\* See, e.g., Julie Jargon, Annie Gasparro. and Heather Haddon,

Far Amazon, Now Comes the Hard Part, Wal! Street Journal

(June 18, 2017, 7:07 p.m.), https://www.wej.com/articles/for-

amazon-now-comes-the-hard-part- 1497827240 (descrimng

Amazon's need to “solve the ‘last mile’ logistics puzzle”).

14

infrastructure. Far from taking place solely in the

ether, online sales are transacted across and upon the

physical State. Absentee e-commerce depends upon

modern, well-developed government and extensive

public infrastructure to conduct its business.

Yet while a State may require Walmart to collect

sales taxes when it conducts an online sale, Quill gives

Wayfair constitutiona! immunity from that obligation.

Quill incorrectly describes this as “exemption from

state taxation.” 504 U.S. at 316. In fact, the transac-

tion is still taxed; Wayfair is exempt only from the de

minimis cost of collecting the tax.

But the Court’s own confusion reveals the real value

to absentee retailers: the widespread misimpression

that their sales are duty-free. (See Pet. 19.) Given

the tight margins in the retail industry, these “no tax”

sales have a huge advantage. States can, and do,

struggle to collect those taxes. Witness Vermont's

decision to send “close to 20,000 letters to Vermonters

telling them they may owe sales tax for online and

o.her purchases.”'? The practical reality is that Quill

“creates an interstate tax shelter for one form of busi-

ness,” 504 U.S. at 329 (White, J., concurring in part

and dissenting in part), while turning millions of

online customers into unknowing tax cheats.

Even at the time of Quill, the Court recognized that

Bellas Hess's 25-year-old physical-presence require-

ment was contrary to “current Commerce Clause juris-

\9 Morgan True, State sending 20,000 letters to collect

alternative sales tax, Brattleboro Reformer (Sept. 4, 2017, 5:33

p.m.), http://www.reformer.com/stories/state-sending-20000-

letters-to-collect-alternative-sales-tax,518443.

15

prudence,” which expressly held that the Commerce

Clause did not “relieve those engaged in interstate

commerce from their just share of the state tax burden

even though it increases the cost of doing business.”

Id. at 310 & n.5 (maj. op.) (internal quotation marks,

citation, and brackets omitted). The Court justified

this unfair discrepancy based on “settled expectations”

and “reliance interests.” Jd. at 316-17. But such “reli-

ance interests ... cannot justify an inefficient [and

narrow] rule,” Leegin Creative Leather Prods., Inc. v.

PSKS, Inc., 551 U.S. 877, 906 (2007), particularly

given that the oft-boasted “disruptive innovation’”® of

e-commerce logically precludes claiming reliance inter-

ests. Moreover, that reliance rationale has withered

over the past quarter century even while the “just

share of the state tax burden” left uncollected by ab-

sentee retailers has swollen enormously.

In fact, to the extent any retailers possess a reliance

interest that merits the Court’s recognition, it is the

brick-and-mortar retailers that have—-over the course

of decades—invested billions of dollars in helping liter-

ally build up local communities, only to discover that

this footprint carries with it an cnormous compctitive

tax disadvantage when it comes to retail sales, wheth-

er in-store or online.

Take, for example, RLC member Petco. When Petco

began in 1965, it was a mail-order business, and it did

20 See A.W., The Economist explains: What disruptive

innovation means, The Economist (Jan. 25, 2015),

https://www.economist.com/blogs/economist-

explains/2015/0 l/economist-explains- 15.

16

not expand beyond California until 1980.2! By 1994, it

had expanded into 13 States,22 and by 2008, it had

reached all 50 States.2° This is, by any measure, a

classic American success story, and exactly the kind of

interstate economic integration that the Commerce

Clause was designed to foster.

While Petco was investing millions in providing ex-

emplary pet care and products to customers in com-

munities in all 50 States, the internet e-commerce

boom changed retail. Petco adapted by complementing

its physical stores with a return to its mail-order roots

via Petco.com. When Petco sells its goods via Pet-

co.com, it accurately informs customers that, “[b]y law,

we must collect applicable sales tax for orders shipping

to states where we have retail stores.”24 By contrast,

when petsupplies.com sells the same products, it poses

the question, “Must I pay sales taxes?’ and answers it,

“We are required to collect sales tax for orders deliv-

ered in the states [where] we are located: PA, MO, OH,

CT and NY,” recommending that customers do their

own research into their “state’s tax regulations for

online purchases, as petsupplies.com is not responsible

2! https://about.petco.com/1960s8-80s-petcohistory (last visited

Oct. 24, 2017).

22 https://about.petco.com/1990s-petcohistory (last visited Oct.

24, 2017).

23 https://about.petco.com/early2000s-petcohistory (last visited

Oct. 24, 2017).

24 https://www.petco.com/content/petco/PetcoStore/en_US/pet-

services/help/help-payments-fees. html (last visited Oct. 24,

2017).

17

for [any other] individual state sales tax collection.”?®

Far from vindicating “settled expectations” and “reli-

ance interests,” the interaction cf Quill and e-

commerce has instead turned Petco’s amazing 50-state

expansion into a competitive disadvantage against

absentee retailers like petsupplies.com, which only

collects sales tax in five States. Retailers now hesitate

to expand into new states precisely to avoid such a

disadvantage. See Anderson, Sales Taxes, supra, at

237-39.

This is just one small example of how the “signifi-

cantly changed circumstances” of the past 25 years

have not only eroded the economic premises of Quil/

but also imperiled far more legitimate expectation

interests than the ability to inaccurately claim duty-

free status or avoid the minimal cost of collecting sales

tax. These “changed circumstances” require the

Court's prompt attention. “It’s no secret the retail

industry is undergoing a transformational period that

has many scaling back physical operations, shuttering

stores, reorganizing mounting debt loads, and in some

cases ending up in bankruptcy court.” 6

It is imperative that, as the retail industry adapts to

the growing ubiquity of the internet and e-commerce,

that transformation is driven by business efficiencies

and not tax dodges, so that community-based retailers

25 https://www.petsupplies.com/CS/ShippingI nfo.aspx#2 (last

visited Oct. 24, 2017).

26 Corinne Ruff & Ben Unglsebee, The running list of 2017

retatl apocalypse victiuns, Retail Dive (July 5, 2017),

http://www.retaildive.com/news/retail-bankruptcies-

2017/446086/.

18

are not forced to abandon their physical presence in

order to avail themselves of Quill’s “tax shelter.” The

invisible hand of the market, and not the visible thumb

of Quill on the scales, should guide retail’s growth.

Il, FAR FROM PROMOTING STABILITY IN

THE LAW, THE PHYSICAL-PRESENCE

REQUIREMENT IS GENERATING A

WELTER OF LEGISLATION AND

LITIGATION

As Justice Kennedy noted—and as South Dakota’s

petition powerfully establishes—the “tax shelter” cre-

ated by Quill is draining State and local coffers of

desperately needed tax revenue. Unsurprisingly, the

States are not sitting idly by. While South Dakota has

enacted a direct and forthright challenge to the physi-

cal-presence requirement, other States have attempted

“to find ways of achieving comparable results through

different means,” DMA II, 814 F.3d at 1151 (Gorsuch,

J., concurring). Some States have done this by at-

tempting to get as close to what Quill forbids as possi-

ble without coming within its literal terms, such that

general Commerce Clause norms will permit the taxa-

tion. /d. And others have remained within Quill’s

literal terms but, like Houdini in a straight-jacket,

engaged in such contortions as to escape the decision’s

restraint. See, e.g., 830 Mass. Code Regs. 64H1.7

(defining “physical presence” to include, inter alia, “the

use of in-state software (e.g., ‘apps’) and ancillary data

(e.g., ‘cookies’) which are distributed to or stored on the

19

computers or other physical communications devices of

a vendor's in-state customers’”).?’

All of these legislative novelties impose far greater

burdens than the nominal cost of collecting sales taxes

at the point of sale, and all of them have spawned

litigation as absentee retailers struggle to maintain “a

competitive advantage over their brick-and-mortar

competitors thanks to Bellas Hess and Quill.” DMA I,

814 F.3d at 1150 (Gorsuch, J., concurring). The result

is that the physical-presence requirement has the

arbitrariness and harshness of Draconian law but not

the consistency or stability. Quill was thus simply

wrong when it concluded that the “artificiality” of the

physical-presence requirement would be “more than

offset by the benefits of a clear rule.” 504 U.S. at 315.

Present circumstances show that the physical-presence

requirement does not “firmly establish[] the boundaries

of legitimate state authority to impose a duty to collect

sales and use taxes” or “reduce[] litigation concerning

those taxes.” Id.

The shifting boundaries of State taxation have giv-

en rise to litigation over Quill’s effect in Alabama,

Colorado, Indiana, Massachusetts, South Carolina,

27 The real effect of Quill has been to encourage the States to

adopt gerrymandered approaches to sales tax collection that

violate basic principles of suund taxation recognized at least

since Adam Smith wrote The Wealth of Nations: that lke

enterprises be taxed the same way; that taxes be obvious to the

taxpayer at the time of the transaction; that taxes be collected

at the most opportune moment for the taxpayer; and that

governments employ the most efficient forme of tax collection.

See Tyler A. LeFevre, Justice in Taxation. 41 Vt. L. Rev. 763,

769-70 (2017).

20

Tennessee, and Wyoming.”* Pennsylvania’s legislature

just passed a new online sales tax law that incorpo-

rates features of Colorado’s reporting and the econom-

ic-nexus approach, and Mississippi seems poised to

adopt one as well.*® These will no doubt yield chal-

lenges, too. Many of these State rules have already

taken effect (or will soon), imposing registration, collec-

tion and remittance requirements—at least one impos-

es penalties for failure to act by October 1, 2017. See

830 Mass. Code Regs. 64H1.7. While Respondents

may argue that such a ferment should cause the Court

to wait and watch the development of the law, there

are compelling reasons not to do so here.

First, as explained above, time is of the essence if

community-based retailers are to maintain their physi-

cal presence. (See supra pp. 10-18.)

Second, waiting and watching as businesses and

States maneuver around Quill is like watching to see

how a badly broken bone knits on its own before decid-

ing whether or not to set it back in proper alignment.

The business and legal structures that are growing up

around Quill are crooked. Some may prove workable,

28 The RLC has collected general information about this area of

litigation, as well as pleadings from some of the cases, on its

website. See http://www.rila.org/enterprise/

retaillitigationcenter/efairnesslitigation/Pages/eF airness%20

Litigation.aspx (last visited Oct. 24, 2017).

29 A dozen ways Pa,’s 2017-18 state budget may impact your life,

Penn Live (Oct. 27, 2017, 10:19 a.m.), http://www.pennlive.com/

politics/index.ssf/2017/10/a_dozen_ways_pas_2017-8_state.html.

% https://s3.amazonaws.com/pdfs.taxnotes.com/2017/2017-

77863_STTDocs-MS-Remote-Sellers-Rule-Economic-

Statement.pdf (last visited Oct. 24, 2017).

21

after a fashion, but they will necessarily be inferior to

the structures that would arise from a level playing

field and a coherent Commerce Clause jurisprudence.

Third, none of the other cases arising from State ef-

forts to address Quills distortion is as timely and un-

encumbered a vehicle as this one. For instance,

Newegg’s challenge to Alabama’s sales tax raises is-

sues of state law and good-faith reliance that are not

present in this case.*! The challenge to Massachu-

setts's new tax policy rests on state administrative

procedure and the Internet Tax Freedom Act as well as

on the Commerce Clause and Quill.32 Moreover, a new

challenge to Massachusetts’s pulicy has just been filed

in Virginia—with the inevitable jurisdictional issucs

that raises—adding vet another layer of complexity .*4

Similar complexities exist in the other lawsuits as

well. Moreover, those cases may take years to reach

31 Newegg Inc.'s Notice of Appeal of the Alabama Dept. of

Revenue's Final Assessment of Seller's Use Tax,

http://www.rila.org/enterprise/retaillitigationcenter/Documents/

E-Fairness%20F iles/Newegg-)nc -Alabama-Tax-Tribunal-

Notice-of-Appeal-filed-J une-8-2016.pdf (last visited Oct. 24,

2017).

32 American Catalog Mailers Association and Netchoice's

Verified Complaint for Declaratory Judgment,

http://www.rila.org/enterprise/retaillitigationcenter/Documents/

E-Fairness% 20Files/Verified%20Complaint% 20

for%20Declaratory % 20Jud%206- 13-17%20(1).pdf (last visited

Oct. 24, 2017).

3 Tracy Maple. Crutchfield sues to block Mussachusetts from

collecting online sales tax. Digital Commerce 360 (Oct. 25.

2017), https://www.digitalcom merce360.com/20 1 7/10/25/

crutchfield-sues-block-massachusetts-collecting-online-sales-

tax/.

22

this Court. During that time, States will struggle to

establish tax policy to address the internet's accelerat-

ing transformation of retail while bound by a rule

made for mail-order long before the internet even ex-

isted. These are circumstances that call not for delay

and “percolation,” but for swift correction of a legal

standard widely agreed to be wrong.

South Dakota’s law, and its pending petition, pro-

vide a clean, direct challenge to Quill and an excellent

example of how the ordinary economic-nexus approach

can provide a brighter line than the physical-presence

requirement. Requiring retailers with more than

$100,000 in in-state sales or 200 in-state transactions

to collect sales tax is vastly more straightforward than,

for example, requiring retailers to report transactions

so that the State can send dunning letters to consum-

ers, see, e.g., DMA, 135 S. Ct. at 1127 (describing Colo-

rado’s law), or determining whether electronic data

stored on in-state devices constitutes a physical pres-

ence, see 830 Mass. Code Regs. 64H1.7. It also has the

virtue of treating community retailers and absentee

retailers the same way when they participate in e-

commerce. The RLC respectfully submits that there

will not be a better time, or a better vehicle, to set the

Court’s dormant Commerce Clause doctrine aright so

that the retail industry and sales tax policy can devel-

op as they should.

23

lil. THE COURT SHOULD NOT EXPECT

CONGRESS TO CORRECT THE

CONSTITUTIONAL ERROR OF BELLAS

HESS AND QUILL

The hope of congressional! intercession is not a basis

for this Court to decline to reconsider the judge-made

physical-presence requirement.

In Qurll, the Court left the physical-presence re-

quirement in place because “even if we were convinced

that Bellas Hess was inconsistent with our Commerce

Clause jurisprudence,” the error was one that “Con-

gress has the ultimate power to resolve.” 504 U.S. at

318. That is not quite right. Only this Court has the

power to correct the constitutional error that is the

basis of Bellas Hess and Quill, namely the notion that

the Constitution forbids the States from requiring that

absentee retailers collect sales tax unless Congress

grants them that power by largesse. Congress cannot

overrule this Court's interpretation of the Commerce

Clause. At most Congress can bypass the error by

returning to the States as a matter of legislative grace

the taxing power denied them by this Court as a mat-

ter of constitutional law.*4

The Commerce Clause holdings in Bellas Hess and

Quill are not political decisions, but legal ones about

the default allocation of sales-taxing power between

the States and Congress in our federal system of gov-

34 To be sure, dormant Commerce Clause rulings are the

constitutional holdings most susceptible to congressional

override, e.g., United States v. Lopez, 514 U.S. 549, 580 (1995)

(Kennedy, J., concurring), but they are nevertheless distinct

from statutory interpretation or common-law rulings.

24

ernment. Were the Court to reevaluate the physical-

presence requirement, it would be deciding not wheth-

er, as a matter of policy, States ought to require inter-

net-only sellers to collect sales tax but whether, as a

matter of law, States possess the inherent constitu-

tional authority to do so absent congressional authori-

zation. Conversely, were Congress to evaluate wheth-

er to bypass Quill through legislation enabling State

laws such as South Dakota’s, it would not be interpret-

ing the Commerce Clause. Instead, it would be weigh-

ing myriad political considerations that have nothing

to do with the Constitution.

While the constitutional and political questions are

distinct, this Court’s decisions in Bellas Hess and Quill

exert enormous influence on the political process be-

cause of inertia and endowment effects. The same

political body may be loath to strip States of their sov-

ereign taxing power and loath to pass legislation that

could be misinterpreted as a tax increase. Thus, this

Court’s legal ruling as to where the Constitution ini-

tially places the taxing power has been not just the

first word, but also the last word on the political ques-

tion over the past 50 years. Just as it is impossible for

Congress to correct this Court’s interpretation of the

Commerce Clause, it may well be impracticable for

Congress to remedy that ruling’s consequences.

“[I]n the absence of congressional action this Court

has prescribed the rules which determine the power of

states to tax interstate traffic, and therefore should

alter these rules if necessary.” Capitol Greyhound

Lines v. Brice, 339 U.S. 542, 546 (1950), abrogated on

other grounds by Am. Trucking Ass’ns, Inc. v. Smith,

496 U.S. 167 (1990). As this Court has recognized, “it

is hard to see how the judiciary can wash its hands of a

25

problem it created,” even if the bottom-line outcome

could be said to implicate policy considerations often

left to political branches. See Exxon Shipping Co. v.

Baker, 554 U.S. 471, 507 (2008). “[W)hen we err in

areas of judge-made law, we ought to presume that

Congress expects us to correct our own mistakes-——not

the other way around.” Halliburton Co. v. Erica P.

John Fund, Inc., 134 S. Ct. 2398, 2426 (2014) (Thomas,

J., concurring in the judgment).

The RLC respectfully submits that where the Court

intervenes in interstate commerce with a “fixed” judge-

made rule, it has the obligation to review from time to

time whether that rule is reflecting or distorting cur-

rent “economic realit[y].” See Khan, 522 U.S. at 21.

That is exactly what the Court did in Quill, when it

gave the physical-presence requirement a 25-year

checkup. Now another 25 years have passed, and the

need for another checkup is more pressing than ever.

Regardless of how the Court ultimately resolves this

case on the merits, at a minimum the retail sea change

over the past quarter century requires that the Court

give a hard, considered look at the physical-presence

requirement to decide whether such an “artificial”

constitutional rule must still be maintained on account

of putative reliance interests. Quill, 504 U.S. at 315.

Such review is the proper role of the Court, not Con-

gress, for “[ijt is emphatically the province and duty of

the judicial department to say what the law is.” Mar-

bury v. Madison, 1 Cranch 137, 177 (1803).

CONCLUSION

The Court should grant South Dakota's petition for a

writ of certiorari and eliminate the physical-presence

requirement.

Respectfully submitted,

DEBORAH WHITE

RETAIL LITIGATION

CENTER, INC.

1700 N. Moore Street,

Suite 2250

Arlington, VA 22209

NOVEMBER 1, 2017

DONALD B. VERRILLI, JR.

Counsel of Record

MUNGER, TOLLES & OLSON LLP

1155 F. Street, NW, 7th Floor

Washington, D.C. 20004

donald.verrilli@mto.com

(202) 220-1100

MARK R. YOHALEM

MUNGER, TOLLES & OLSON LLP

355 S. Grand Ave., 35th Floor

Los Angeles, California 90071