In a closely watched 5-to-4 decision authored by retiring Justice Kennedy in South Dakota v. Wayfair, 585 U.S. ___ (2018), the U.S. Supreme Court reversed decades of Supreme Court precedent, giving state and local governments the right to collect sales taxes from out of state retailers on online sales made into the local jurisdiction.

Business Taxation
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The case involves Wayfair, a furniture and home company which sold products over the Internet into the state of South Dakota.  The law in question required the payment of a 4.5% sales tax by out-of-state retailers that make at least 200 sales or sales totaling at least $100,000 in South Dakota.

Prior to the Wayfair case, the standard, from two Supreme Court cases named Bellas Hess and Quill, was that a company had to have a physical presence in the state in order to be required to pay local tax.  A “physical presence” was something like a retail outlet, employees or property in the jurisdiction.

The Supreme Court stated, overruling decades of precedent, that the physical presence rule is unsound and incorrect. The Court noted that the rule has become removed from economic reality as technology has advanced.  The Court stated that the physical presence rule creates market distortions and puts local businesses and others at a competitive disadvantage given the new online marketplace.

The court concluded that, if a retailer establishes a substantial nexus with a state, that state can tax the sales in that state.  In this case, they concluded that the South Dakota law’s requirements of number of sales or total value satisfies the substantial nexus requirement.

Given that so many states rely on sales tax revenue for huge portions of their budgets and state governments have a strong aversion to new income taxes, this green light from the Supreme Court means that other states are likely to take a hard look at their laws and consider the enactment of laws calling for the collection of online sales taxes like the one in South Dakota.

This information does not constitute legal or tax advice.  You should, of course, consult an attorney or tax adviser regarding any taxation issues you might have, as each situation is unique.

U.S. Supreme Court
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In a recent opinion column for Wired, Laurence H. Tribe and Joshua Matz took an interesting look at the Supreme Court’s views on emerging technology. Tribe, a professor of constitutional law at Harvard University, and Matz, a practicing attorney and former law clerk for Justice Kennedy, examined how those views have led to surprising alliances on particular cases that cannot be explained by the more traditional dichotomy of originalists versus those that view the Constitution as a living document.  They also suggest that a judge’s views on technology should be examined when considering prospective judges.

For example, Tribe and Matz describe Brown v. Entertainment Merchants Association, a 2011 case in which the Court examined a California law that required parental approval for the sale or rental of violent video games to minors.  The late Justice Scalia, an originalist icon, authored the majority opinion striking down the law. That opinion was surprisingly joined by Justices Kennedy, Bader Ginsburg, Sotomayor and Kagan, who did not typically find themselves on the same side of a case with Justice Scalia due to their differing views on constitutional interpretation.  In Scalia’s view, video games presented the same issue as other forms of violent entertainment that were once viewed as potentially harmful to minors, and California’s law was impermissible censorship that violated the First Amendment.  Chief Justice Roberts and Justice Alito concurred in the decision, but wrote a separate opinion because they believed that “[t]here are reasons to suspect that the experience of playing violent video games just might be very different from reading a book, listening to the radio, or watching a movie or a television show.”  Justice Breyer dissented, citing social science papers that indicated a link between simulated violence and actual violence as justification for the law.

The issue of new technology arose again when the Court heard Maryland v. King in 2013, which examined the constitutionality of a law that required police officers to collect DNA samples from individuals charged with certain crimes.  In this case, the Court upheld the law in a 5-4 decision, with the majority opinion authored by Justice Kennedy and joined by Justices Alito, Roberts and Breyer.  Although Alito, Roberts and Breyer seemed wary of the effects of new technology in Brown v. Entertainment Merchants Association, they did not appear to have similar concerns in this case.  The majority determined that Maryland’s DNA sampling was for the purposes of identification, comparable to photographing and fingerprinting that police typically perform during the booking process.  Justice Scalia’s dissent, in contrast, discusses in detail Maryland’s DNA collection process and how that DNA is checked against the FBI’s DNA database (known as CODIS), and uses this discussion to argue that the purpose of Maryland’s DNA collection is not to identify the individual in custody, but rather to check that DNA against unidentified DNA collected at crime scenes.

Occasionally, as Tribe and Matz mention, the Court shares similar views regarding new technology.  One example occurred in 2014, when the Court unanimously determined that a warrant is required to examine the digital information on a suspect’s cell phone.  The opinion discussed the rapid development of “smartphone” technology and used the huge amount of information that could be obtained from searching a phone and the digital nature of the data to distinguish this type of search from the brief physical searches that the Court had previously approved of in connection with custodial arrests.

According to Tribe and Matz, the Court is likely to encounter new cases involving emerging technology such as 3-D printers, smart-home devices and encrypted cell phones, and their understanding of, and attitude towards, these technologies could have big effects on technological innovation.  Instead of limiting our examination of judicial candidates to the traditional debates over originalism, textualism, attitudes toward business or attitudes towards criminal defendants, Tribe and Matz suggest that we should ask how a prospective judge views technological innovation, and should prefer judges that have the capacity (and willingness) to understand the technological issues presented to them.

We recommend reading the article in full, which can be found here.

After the Supreme Court’s decision in Alice v. CLS Bank, many in the patent community have faced frustration in trying to understand when software-related inventions are patent eligible. A recent Federal Circuit decision provides some much-needed guidance on this question.

Copyright: hywards / 123RF Stock Photo
Copyright: hywards / 123RF Stock Photo

The court in Enfish LLC v. Microsoft (Fed. Cir. 2016) disagreed with a lower court ruling that claims covering a self-referential table were patent ineligible because they were directed to an abstract idea. The court found that the claims were instead “directed to a specific improvement to the way computers operate, embodied in a self-referential table.”

The court explained, “[w]e do not read Alice to broadly hold that all improvements in computer-related technology are inherently abstract…nor do we think that claims directed to software, as opposed to hardware, are inherently abstract…[s]oftware can make non-abstract improvements to computer technology just as hardware improvements can, and sometimes improvements can be accomplished through either route.”

Further, the court determined the claims at issue were patent eligible because, unlike claims in previously decided cases which recited use of an abstract mathematical formula on any general purpose computer, or covered tasks ordinarily performed by a computer, the indexing technique embodied by the claims in Enfish was directed to a specific improvement to computer functionality – specifically the ability of a computer to perform faster searches of data than it could using a relational model.

As such, the Federal Circuit’s decision in Enfish has provided a glimmer of hope to applicants and patent holders seeking to protect software-related inventions that in some way improve the functioning of a computer.

JR Lanis writes:

The Securities and Exchange Commission has announced new Lesbian, Gay, Bisexual, and Transgender (LGBT) inclusive interpretations of the terms “spouse” and “marriage.”  This update brings SEC regulations into compliance with the Supreme Court’s decision in United States v. Windsor, which struck down the Defense of Marriage Act’s exclusion of lawfully wedded same-sex couples from federal recognition.

Copyright: tonobalaguer / 123RF Stock Photo
Copyright: tonobalaguer / 123RF Stock Photo

The succinct SEC order states that the Commission will read the term “spouse” to include “an individual married to a person of the same sex if the couple is lawfully married under state law, regardless of the individual’s domicile,” and the term “marriage” to include “a marriage between individuals of the same sex.”  These new definitions apply to the federal securities statutes administered by the SEC, the rules and regulations promulgated under those statutes, releases, orders, and any guidance issued by the staff or the SEC.  Full text of the order can be found here.

The SEC has lagged almost two years behind numerous other federal agencies that updated their regulations after the Windsor decision was announced on June 26, 2013.  In August 2013, the Treasury Department and the Internal Revenue Service issued orders recognizing legally married same-sex couples as married for federal tax purposes.

The SEC made this announcement one week before the Supreme Court decided in Obergefell v. Hodges that the 14th Amendment requires all states to issue marriage licenses to same-sex couples.  This landmark ruling only strengthens the Windsor ruling and will likely precipitate similar decisions from other agencies to make their regulations more LGBT-inclusive.

Alan A. “JR” Lanis, Jr., is a partner in Fox Rothschild’s Los Angeles (Century City) office.