Legal Docket: The future cost of online purchases

MARY REICHARD, HOST: It’s Monday morning, the start of a new work week for The World and Everything in It. Today is the 23rd of April, 2018.

Good morning to you, I’m Mary Reichard.

NICK EICHER, HOST: And I’m Nick Eicher.

The U.S. Supreme Court handed down two rulings we did not tell you about last week.

First, United States versus Microsoft.

It’s a case involving the reach of search warrants for digital data.

The federal government had a warrant, but Microsoft refused to hand over to authorities certain electronic communications.

The company argued the information was stored on servers in Ireland, and so the American warrant did not apply there.

But as it turned out, Congress solved the problem right after arguments in that case. Lawmakers approved new legal standards for international data access, and they cover the exact issues in dispute in this case.

Microsoft will have to comply with the warrants and the justices declared the case moot.

REICHARD: A 6-3 ruling in a death-penalty case asked: What records should an appeals court review when deciding whether to allow further appeal?

Some lower courts explain why they deny an appeal; others do not.

Judges are instructed to find the most recent state court ruling that does include a rationale and then apply that reasoning to a ruling without a reason for denial.

EICHER: Now, on to oral arguments.

The first case will affect your bank account one way or another.

Say you need a new couch. You might visit a furniture store to check out colors, dimensions, and prices. Then you visit an online furniture store, and find something that can be delivered in a few days, but for less.

Brick-and-mortar stores resent this practice. There’s even a word for it: “showrooming.” And it’s one reason why you see physical stores closing down. They can’t compete on price.

What’s more, the states where those brick-and-mortar stores operate often don’t collect the sales tax revenue when you buy online. Although consumers are supposed to pay what’s called a “use” tax for online purchases, most Americans don’t. So, they perceive the transaction as tax free, and obviously cheaper.

REICHARD: Lawmakers in South Dakota decided to do something about it.

In 2016, the legislature passed a law that requires online vendors to charge its residents a sales tax when they buy online.

It doesn’t apply to everyone: It affects only sellers with at least 200 transactions a year, or gross revenues from sales to South Dakota in excess of $100,000.

After passing that law, the state then sued some big online stores for noncompliance: the home-goods site Wayfair, discount retailer Overstock.com, and tech supplier Newegg.

At the Supreme Court, here’s the opening salvo from South Dakota Attorney General Marty Jackley.

JACKLEY: First, our states are losing massive sales tax revenues that we need for education, health care, and infrastructure. Second, 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.

This is no small issue in South Dakota. It’s one of the few states without a state income tax. Sixty-three percent of South Dakota’s budget comes from sales tax revenue.

So the state wants the Supreme Court to toss out a rule it made over 50 years ago: namely, that only sellers with a physical presence in a state have to collect and remit sales taxes to that state.

The court reaffirmed the rule in 1992 in a case called Quill.

But throwing out that rule means compliance costs to calculate taxes.

Justice Sonia Sotomayor worried about little, independent online sellers who use platforms like Etsy to sell goods.

Listen to this exchange with Attorney General Jackley, again for South Dakota.

SOTOMAYOR: So what are we going to do with the costs that we’re going to put on small businesses?

JACKLEY: The small businesses are the ones that are affected most by Quill. If you look at that small business on Main Street, it is that business that is put at a price disadvantage because of Quill.

Online shopping in 2016 reached $360 billion in the United States.

The biggest internet retailers, like Amazon and Walmart, already collect sales taxes on direct sales in 45 states. And they aren’t required to. But for third-party sellers on their sites — think Amazon Marketplace — they do not collect sales tax.

But South Dakota’s law applies to all vendors, big and small. They’ll have to calculate and remit sales tax to literally thousands of different tax jurisdictions. It’s a huge compliance burden.

That’s why, retailers argue, for continuity in the law. The trigger for when to collect the sales tax should continue to be when a retailer has a physical presence in a state.

Justice Stephen Breyer was bothered by lack of hard data from both sides.

BREYER: …because I read through these briefs. When I read your briefs, I thought absolutely right. And then I read through the other briefs, and I thought absolutely right. And you cannot both be absolutely right. (Laughter.) All right. So why is it, one, you have wildly different estimates of costs, revenues, and what states are losing or not?  

South Dakota says it’s lost out on $50 million per year in sales tax revenue. Across all states, one study estimated around half that: $23 billion a year in lost revenues. The U.S. General Accounting Office estimates an even lower number: $13 billion.

Whatever the actual dollar amount is, the trend is clear: nearly half of the growth in retail sales came from online shopping, according to Bloomberg. And foot traffic into physical stores trends the other direction.

Lawyer for the retailers, George Isaacson, argued that tax schemes like South Dakota’s discriminate against interstate commerce.

Justice Ruth Bader Ginsburg had a question for him:

GINSBURG: Why isn’t it, far from discriminating, equalizing sellers. That is, anyone who wants to sell in-state, or who exploit an in-state market are subject to the in-state tax. Why isn’t that equalizing rather than discriminating?

Isaacson ran through the history. Back in the 1960s, more than 2,000 different sales- and use-tax jurisdictions existed. Each had different rates and exemptions, and different taxable items with different filing requirements and audit obligations.

It was quite a burden on in-state commerce even at those levels.

Then, Isaacson amplified that point. He mentions the 1960s case by name, Bellas Hess.

ISAACSON: That figure today is over 12,000 different jurisdictions. So the concern that the Bellas Hess and Quill courts had was the notion that a free and open market would be encumbered by that degree of complexity. And that complexity has only worsened over time.

Justice Neil Gorsuch mentioned maybe that old case is irrelevant today.

GORSUCH: Why should we favor, this court favor, a particular business model that relies not on brick and mortar but on mail order? I understand in Bellas Hess the court was concerned about a nascent, small mail order industry. Those concerns seem a little antiquated today.

ISAACSON: Borders count. States exercise their sovereignty based upon borders, territorial limits.

And then this zinger from Justice Anthony Kennedy: It’s not often you hear such a frank admission from the high court.

KENNEDY: This court has made a statement of constitutional law that … has now, especially in light of the cyber age, proven incorrect.

The federal government in this case likes the idea of taxing internet sales as a fair way to level the playing field. President Trump has tweeted about it. Deputy Solicitor General Malcolm Stewart laid out the solution this way:

STEWART: Whatever this Court decides … Congress can Act. Congress can impose whatever solution it believes is appropriate. And indeed if states are given greater latitude to experiment in this area, to devise different schemes that would balance the interests of out-of-state retailers against the interests of consumers within the states’ brick-and-mortar retailers … . Congress will have a wider variety of models to look at to decide what aspects of each it would like to — to choose.

Isaacson agreed. Business needs clarity, and Congress ought to figure this out.

ISAACSON: It can require a clearinghouse that can be used for the processing of payments. It can require standard uniform definitions of products so that food and sportswear and clothing doesn’t mean one thing in one jurisdiction and another elsewhere.

The problem is Congress has not acted, despite decades of a brewing problem.

Most states back South Dakota in its quest for tax dollars. Those states see the current law as creating an artificial imbalance.

This is an odd time in our history. Online sales are still less than 10% of total sales, but times are changing. Five justices look to be sympathetic to South Dakota’s taxing scheme, unless Congress acts quickly and makes this case moot.

My second case today deals with patent infringement.

Here, the patent infringer had to pay a $12 million royalty to the infringee.

The infringer manufactured patented component parts in the United States, and then shipped them overseas for assembly.

The question is whether the patent holder can get both royalties and damages in the form of lost profits. The general rule is patent enforcement stops at the legal U.S. borders. But a narrow exception comes in here, and the two sides are arguing over it.

I’ll not delve into the technical details, but you can get a flavor of the case from Justice Breyer’s usual flair for the hypothetical. Listen.

BREYER: Joe Smith goes to France one day and he makes a tiny particle, which it turns out violates somebody else’s French patent. He ships it back to the United States, where it forms a small part of a very large and valuable gizmo. And all of a sudden, we discover that he’s paying the entire profits of the entire gizmo industry to some French company that had a small patent on a small part. 

Justice Breyer asks, what if every nation in the world chases down profits and royalties. He foresees chaos.

And that’s this week’s Legal Docket.

(AP Photo/J. Scott Applewhite, File) In this Oct. 10, 2017, file photo, the Supreme Court in Washington is seen at sunset. 

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