There Is No Retroactivity Concern With Overruling Quill

A very long post about an admittedly esoteric issue that could determine the outcome of the Supreme Court’s hugely significant online sales tax case

The Supreme Court will decide this spring in South Dakota v. Wayfair whether to allow states to impose sales tax obligations on retailers who lack a “physical presence” in the state. When the Supreme Court last considered the question, in Quill v. North Dakota, 504 U.S. 298 (1992), the Justices appear to have balked at overruling the physical presence requirement on account of worries that states would impose retroactive liability on out-of-state sellers. Retailers who seek to preserve the physical presence rule are again raising the prospect of retroactive liability in an attempt to scare the Court away from overturning Quill.

The Justices need not worry. There are at least two ways that the Justices can overrule Quill without making their decision apply retroactively. The most obvious way would be to say that the decision to overrule Quill meets the criteria for purely prospective application set forth in Chevron Oil Co. v. Huson, 404 U.S. 97 (1971). And while that approach might not appeal to the Justices who think that Chevron Oil was wrongly decided, those Justices have another alternative: they can (and should) say that imposing sales tax liability on sellers whose customers already are liable for use tax would amount to discrimination against interstate commerce. All of the Justices appear to agree that the Constitution prohibits discrimination against interstate commerce (though Justice Thomas arrives at that conclusion through a different route than many of his colleagues). While the imposition of sales tax obligations on out-of-state sellers does not, as a general matter, run afoul of that prohibition, the imposition of retroactive sales tax obligations on out-of-state sellers almost certainly would.

Quill, Quickly

My guess is that almost all readers of this post already are familiar with the Quill issue or else their eyes have glazed over already. In any event, here’s a two-paragraph summary that Dormant Commerce Clause junkies should feel free to skip:

In National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U. S. 753 (1967), the Supreme Court held that the Constitution’s Dormant Commerce Clause prohibits states from imposing sales tax collection obligations on retailers who lack a physical presence in the state. (If you’re not familiar with the Dormant Commerce Clause already, don’t consult out your pocket Constitution — you won’t find it there.) A quarter century later, in Quill v. North Dakota, the Court reaffirmed Bellas Hess’s Dormant Commerce Clause holding. Then a little thing called the Internet happened, and the revenue loss to states as a result of the physical presence requirement skyrocketed. Consumers still are obligated to pay use tax when out-of-state retailers fail to collect sales tax, but in practice, very few consumers actually remit use tax on their own.

Justice Kennedy, who joined the majority opinion in Quill, took notice of these developments. In a solo concurrence in Direct Marketing Association v. Brohl, 135 S. Ct. 1124, 1135 (2015), Justice Kennedy said that “[t]he legal system should find an appropriate case for this Court to reexamine Quill.” States responded rapidly, and South Dakota passed a law in March 2016 requiring out-of-state retailers to collect sales tax on transactions with residents of the Mount Rushmore State. South Dakota’s law applies only prospectively and only to retailers whose annual sales in South Dakota exceed $100,000 or who conduct 200 or more separate transactions with South Dakota residents each year. South Dakota’s Supreme Court — in a case involving Wayfair,, and Newegg — struck down that law on the grounds that it violates Quill (which it pretty clearly does). Earlier this month, the Supreme Court agreed to hear South Dakota’s case and to reconsider Quill.

The Retroactivity Bogeyman

What does retroactivity have to do with all of this? On first glance, one might think the answer is: Not much. The South Dakota legislation explicitly says that “[n]o obligation to remit the sales tax required by this Act may be applied retroactively.” Indeed, the South Dakota legislation contemplates the possibility that the law would be put on hold during the pendency of a dormant Commerce Clause challenge, and the law makes clear that the obligation to collect and remit sales tax applies only once the litigation is resolved.

But retroactivity turns out to play an important role in the debate over Quill. To understand why, it helps to go to back to the Court’s 1971 decision in Chevron Oil Co. v. Huson. There, the Court established a three-factor test for determining when a new rule should be applied on a prospective-only basis:

First, the decision to be applied nonretroactively must establish a new principle of law, either by overruling clear past precedent on which litigants may have relied, or by deciding an issue of first impression whose resolution was not clearly foreshadowed, see. Second, . . . we must weigh the merits and demerits in each case by looking to the prior history of the rule in question, its purpose and effect, and whether retrospective operation will further or retard its operation. Finally, we have weighed the inequity imposed by retroactive application, for where a decision of this Court could produce substantial inequitable results if applied retroactively, there is ample basis in our cases for avoiding the injustice or hardship by a holding of nonretroactivity.

404 U.S. at 106–07 (citations and internal quotation marks omitted).

Fast forward 13 years to 1984. That year, the Supreme Court held in Bacchus Imports, Ltd. v. Dias, 486 U.S. 263, that the Dormant Commerce Clause bars a state from imposing a tax that discriminates against alcoholic products from out of state. Bacchus effectively overruled the Court’s earlier decision in State Board of Equalization v. Young’s Market Co., 299 U.S. 59, 62 (1936), which said that section 2 of the Twenty-First Amendment allows states to discriminate against importers of liquor. Cf. U.S. Const. amend. XXI, § 2 (“The transportation or importation into any State, Territory, or Possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.”). The Bacchus decision prompted the manufacturer of Jim Beam bourbon to seek a refund of taxes it had paid in 1982, 1983, and 1984 under a Georgia statute that discriminated against imported liquor. Jim Beam’s suit raised the question of whether Bacchus applied retroactively to Georgia and Jim Beam.

Six Justices of the Court agreed that Bacchus applied retroactively, though they couldn’t agree on a single majority opinion. Justice Souter, joined by Justice Stevens, reasoned that the Supreme Court’s decision in Bacchus applied retroactively to the parties in Bacchus, and so it should apply retroactively to Georgia and Jim Beam too. See James B. Beam Distilling Co. v. Georgia, 501 U.S. 529, 544 (1991) (Souter, J.) (“[W]hen the Court has applied a rule of law to the litigants in one case it must do so with respect to all others not barred by procedural requirements or res judicata.”). Justice Souter and Stevens thus would “limit the possible applications of the Chevron Oil analysis” to a choice between full retroactivity and pure prospectivity. Justice Scalia, joined by Justices Marshall and Blackmun, went one step further and said that it is “beyond our power” for the Court to apply a new rule on a purely prospective basis. Id. at 549 (Scalia, J., concurring in the judgment). In their view, Chevron Oil should be overruled entirely. Justice White, for his part, agreed that Bacchus should apply retroactively but wrote separately to say that pure prospectivity is constitutionally kosher in certain cases. See id. at 546 (White, J., concurring in the judgment) (“The propriety of prospective application of [a] decision in this Court, in both constitutional and statutory cases, is settled by our prior decisions.”). Justice O’Connor, joined by Chief Justice Rehnquist and Justice Kennedy, dissented, emphasizing that Chevron Oil remained good law and that “[a] fair application of the Chevron Oil analysis requires that Bacchus not be applied retroactively.” Id. at 559 (O’Connor, J., dissenting).

The ink was barely dry on the separate opinions in Jim Beam when the Quill case reached the Supreme Court. Quill involved a North Dakota law imposing sales tax collection obligations on retailers who engaged in “regular or systematic solicitation” of North Dakota consumers. North Dakota’s law served as a test case that would give the Supreme Court an opportunity to overrule its decision in Bellas Hess.

When the Court heard oral argument in Quill in early 1992, Jim Beam loomed large in the background. The Quill Corporation, a mail-order office supply vendor, noted that most states still had laws on their books that imposed sales tax collection obligations on out-of-state retailers, and so a decision to overrule Bellas Hess could lead to “retroactive liability” that “will literally wipe out” mail-order businesses. See Brief for Petitioner, 1991 U.S. S. Ct. Briefs LEXIS 570, at *76. A number of other companies — including Bloomingdale’s, Harry and David, Neiman Marcus, and Publishers Clearing House — pressed the retroactivity issue in an amicus brief supporting Quill. 1991 U.S. S. Ct. Briefs LEXIS 537. The issue arose multiple times at oral argument as well. 1992 U.S. Trans. LEXIS 189, at *20–24, *32–33.

One might think that the Court could have gotten rid of the retroactivity problem by overruling Bellas Hess while making its decision prospective only. The problem was that under the Scalia/Marshall/Blackmun view in Jim Beam, the Supreme Court does not have the power to issue a purely prospective decision. And if the Court applied its decision retroactively to the parties in Quill, then Justices Souter and Stevens would have agreed that the decision must apply retroactively to everyone else too. Moreover, Justice Thomas, who had replaced Justice Marshall in the span of time since Jim Beam, had not yet made his views on retroactivity known. So there was at least a possibility that if the Court overruled Bellas Hess, a majority of Justices would say that the decision had to be given retroactive effect.

As it happened, the Court voted 8–1 not to overrule the dormant Commerce Clause holding of Bellas Hess. Justice Stevens, who wrote the majority opinion, alluded to the retroactivity concern in a footnote. See Quill, 504 U.S. at 318 n.10 (“An overruling of Bellas Hess might raise thorny questions concerning the retroactive application of those taxes and might trigger substantial unanticipated liability for mail order houses.”). Justice White, in dissent, addressed the retroactivity concern head-on and used it to remind readers of his position in Jim Beam:

The Court hints, but does not state directly, that a basis for its invocation of stare decisis is a fear that overturning Bellas Hess will lead to the imposition of retroactive liability. . . . See James B. Beam Distilling Co. v. Georgia, 501 U.S. 529 (1991). As I thought in that case, such fears are groundless because no one can sensibly insist on automatic retroactivity for any and all judicial decisions in the federal system. . . . If indeed fears about retroactivity are driving the Court’s decision in this case, we would be better served, in my view, to address those concerns directly rather than permit them to infect our formulation of the applicable substantive rule.

Quill, 504 U.S. at 332–33 (White, J., concurring in part and dissenting in part) (citation and internal quotation marks omitted).

In the years since Jim Beam and Quill, the Court has clarified its stance on retroactive application of civil judgments to some extent — though not fully. One year after Quill, seven Justices endorsed the Souter/Stevens view that if the Court applies a rule to the parties in the case before it, then the new rule “must be given full retroactive effect.” Harper v. Va. Dep’t of Taxation, 509 U.S. 86, 97 (1993). Lower courts have interpreted this to mean that purely prospective decisions remain permissible. See, e.g., Nunez-Reyes v. Holder, 646 F.3d 684, 690 (9th Cir. 2011) (en banc) (stating that “a court announcing a new rule of law must decide between pure prospectivity and full retroactivity,” and applying Chevron Oil to determine whether new rule should be applied on a purely prospective basis); Crowe v. Bolduc, 365 F.3d 86, 93 (1st Cir. 2004) (“A court in a civil case may apply a decision purely prospectively, binding neither the parties before it nor similarly situated parties in other pending cases, depending on the answers to three questions . . . .” (citing Chevron Oil factors)); Glazner v. Glazner, 347 F.3d 1212, 1216–17 (11th Cir. 2003) (“Although prospectivity appears to have fallen into disfavor with the Supreme Court, the Court has clearly retained the possibility of pure prospectivity and, we believe, has also retained the Chevron Oil test, albeit in a modified form, as the governing analysis for such determinations in civil cases.”).

But it’s not clear that a majority of the Justices agree that pure prospectivity is allowed. In a 1995 decision, Chief Justice Rehnquist — in an opinion for a unanimous Court which by that point included Justices Kennedy, Thomas, Ginsburg, and Breyer — cast some doubt on whether pure prospectivity remained permissible. See Ryder v. United States, 515 U.S. 177, 184–85 (1995) (stating that “whatever the continuing validity of Chevron Oil after Harper,” there would be no “grave disruption or inequity” justifying a purely prospective holding). Justice Thomas has since said that he thinks pure prospectivity is incompatible with the judicial role. See Montgomery v. Louisiana, 136 S. Ct. 718, 746 n.* (2016) (Thomas, J., dissenting). The only Justice who is clearly on record saying that pure prospectivity is permissible under certain circumstances is Justice Kennedy, who joined two opinions of Justice O’Connor taking that position in the early 1990s. See Am. Trucking Ass’ns v. Smith, 496 U.S. 167, 178 (1990); James B. Beam, 501 U.S. at 549–59 (O’Connor, J., dissenting). But the early 1990s were a long time ago, and there is no guarantee that Justice Kennedy still holds that view. In sum, it’s at least possible that there are five members of the Court who believe that if Quill is overruled, then the decision must apply retroactively.

Wayfair and co-respondents and Newegg made much of this point at the cert stage. They argued:

It is well-established that “when the Court has applied a rule of law to the litigants in one case it must do so with respect to all others not barred by procedural requirements of res judicata.” James B. Beam, 501 U.S. at 544; Harper, 509 U.S. at 90. . . . It is a uniform principle of state and local sales tax law that a seller who is properly charged with the obligation to collect use tax from purchasers in a state but fails to do so becomes liable for the uncollected tax. A ruling by the Court that the Quill rule is invalid will expose all remote sellers that have relied on the rule to retroactive liability in dozens, if not hundreds, or even thousands of jurisdictions.
South Dakota’s choice to forego its remedy for back taxes in the event that the Court were to overrule Quill will not limit the retroactive application of such a ruling with respect to other state and local jurisdictions. . . . While South Dakota has elected to forego its potential recovery of past due use taxes from remote sellers, its election cannot bind other states (or localities), which are free to determine their own remedial approach if the physical presence rule is overturned.

Respondents’ Brief in Opposition at 34–35 (some citations omitted).

Justices who believe that pure prospectivity is permissible probably won’t be swayed by this argument. This would be a very strong case for pure prospectivity under Chevron Oil. First, a decision to overrule Quill would mark a break from precedent. Second, insofar as the case for overruling Quill is based on the ways it distorts the choices of consumers and the supply-chain structure of retailers, past distortions can’t be corrected by retroactive application. Third, there would indeed be substantial inequitable results if out-of-state retailers were required to remit sales taxes that they didn’t collect from consumers (and no practical way for retailers to go back and collect those taxes). For all these reasons, Chevron Oil suggests that a decision to overrule Quill should be purely prospective.

But what of the Justices who think that pure prospectivity is never permissible? Wayfair’s brief in opposition tries to convince those Justices that they’re in a bind. Fortunately, they’re not.

How To Overrule Quill Prospectively Without Relying on Chevron Oil

Significantly, all states with sales taxes also have use taxes. Use taxes apply when sales taxes don’t. For example, New York’s use tax statute, section 1110 of the New York Tax Law, says that “[e]xcept to the extent that property or services have already been or will be subject to the sales tax under this article, there is hereby imposed on every person a use tax for the use within this state on and after [June 1, 1971] except as otherwise exempted under this article . . . of any tangible personal property purchased at retail . . . .” Wording varies state by state (some, like Illinois, describe both buyer-paid and seller-collected taxes as “use taxes”), but the general point remains the same: if the seller doesn’t collect, the buyer is obligated to pay.

Why does this matter to the retroactivity question? Well, let’s say someone in New York bought a sofa in 2017 from Wayfair, which doesn’t collect sales tax on orders shipping to New York. By virtue of section 1110, the state imposed a use tax on the buyer back in 2017. The buyer may or may not have paid the tax (most people don’t), but the unquestionably the use tax was imposed.

Now fast-forward to June 2018. Imagine that the Supreme Court overrules Quill. Imagine, as well, that New York tries to collect sales tax from Wayfair on transactions that occurred prior to June 2018. This seems exceedingly unlikely — New York would almost certainly decide, like South Dakota, that the administrative challenge of extracting sales taxes on past transactions from out-of-state retailers isn’t worth the candle. But let’s imagine, for the sake of argument, that New York tries.

Wayfair would argue, quite justifiably, that this amounts to double taxation of goods sold by retailers who lack a physical presence in New York. When a shopper in Manhattan buys a $1,000 sofa from ABC Carpet and Home on Broadway in Manhattan, he pays a combined city and state sales tax of $88.75. If the shopper bought a $1,000 sofa from Wayfair, she would have been liable for an $88.75 use tax, and now New York (in our hypothetical) wants to collect another $88.75 from Wayfair.

Virtually everyone agrees that the Constitution prohibits states from imposing discriminatory taxes on cross-border transactions. South Dakota fully accepts the validity of the Supreme Court’s decision in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977). Under Complete Auto, a state tax complies with the Dormant Commerce Clause if (and only if) “the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.” Id. at 279. Well, a double tax on cross-border sales clearly “discriminate[s] against interstate commerce.” Complete Auto says that’s not allowed.

What about the fact that the online shopper in New York probably didn’t pay the use tax? For one thing, Complete Auto Transit does not include an exception allowing states to impose taxes that discriminate against interstate commerce as long as evasion is sufficiently rampant. For another, it would be quite difficult for New York to determine whether Wayfair shoppers had paid use tax on sofa sales into the state. The income tax return for full-year residents of New York asks taxpayers to report their use tax liability and gives them a chart to estimate the amount based on federal adjusted gross income. Many other states have similar systems. For any taxpayer who reported a use tax obligation more than $0, it would be impossible for New York to determine whether that amount reflected taxes on the sofa sale.

Maybe New York would try to get around the problem by collecting back taxes from Wayfair and then allowing New York residents who could show they paid use taxes on Wayfair purchases to claim a refund. But even if that could work administratively, Wayfair would still have a very strong argument against Complete Auto. A system that imposes a double tax on cross-border transactions and then requires consumers to file for a refund in order to avoid the double tax is a system that discriminates against interstate commerce, as consumers have to go through the hassle of filing for a refund only with respect to interstate sales.

The key point is that, by operation of section 1110, New York already has imposed a use tax on residents who purchase products from out-of-state sellers. It can’t turn back the clock, and it can’t now impose sales tax obligations on those sellers as well. If Quill is overruled, then out-of-state sellers will be liable for sales tax going forward and the double taxation concern will go away. But as to transactions in the past, New York and other sales tax states are constrained from collecting from sellers due to the existence of their use tax laws and the anti-discrimination rule of Complete Auto. To be sure, the double taxation concern arises any time a seller does not collect sales tax — even on an intra-state sale — in which case the consumer becomes liable for use tax. But the problem here is that the double tax would, at least in effect, specifically target cross-border transactions that escaped sales tax under Quill.

So in sum, if the Supreme Court overrules Quill and holds that Complete Auto applies to cross-border sales, then there is no concern about retroactive application because Complete Auto itself almost certainly prohibits retroactive application. Since states have imposed use tax on consumers already with respect to remote transactions, they can’t force the retailer to remit sales taxes now.

That should more or less resolve the retroactivity question except for one caveat. Justice Thomas believes (and maybe Justice Gorsuch does too) that there is no Dormant Commerce Clause, and so Complete Auto is wrong. For that reason, Justice Thomas also almost certainly will say that Quill is wrong and won’t be concerned about the retroactivity question. But if he remains concerned, he can fall back on his dissent in Camps Newfound/Owatonna v. Town of Harrison, 520 U.S. 564 (1997), in which he suggests that the Constitution does indeed prohibit discriminatory state taxation of interstate transactions through the Import-Export Clause. See id. at 610 (Thomas, J., dissenting). The Supreme Court has said that the Import-Export Clause applies only to foreign commerce, see Woodruff v. Parham, 75 U.S. (8 Wall.) 123 (1869), but if Justice Thomas wants to discard Complete Auto, then presumably he is ready to discard Woodruff too. So even under Justice Thomas’s view, a state couldn’t impose retroactive liability on an out-of-state retailer after overruling Quill.

Taking Stock (and Overstock)

Stepping back for a moment, this whole argument might strike some readers as quite strange. South Dakota and others who want the Court to overrule Quill want to persuade the Court that Quill remains applicable to past transactions. Wayfair,, and Newegg — who want the Court to preserve Quill — also want to persuade the Court that Quill cannot be applied to past transactions if it is overruled now. The states seem to be arguing in favor of constraints on the states, and the retailers seem to be arguing in favor of retroactive liability for retailers.

Strange indeed. But at the end of the day, it all makes sense: South Dakota et al. want to convince the Court that overruling Quill won’t lead to chaos, while the retailers with a vested interest in Quill want to convince the Court of the opposite. Fortunately for all who oppose chaos, South Dakota has it right. The Court can get rid of Quill without imposing retroactive liability on the retailers in this case or anyone else.