The U.S. Supreme Court will consider freeing state and local governments to collect billions of dollars in sales taxes from online retailers, agreeing to revisit a 26-year-old ruling that has made much of the internet a tax-free zone.
Heeding calls from traditional retailers and dozens of states, the justices said they’ll hear South Dakota’s contention that the 1992 ruling is obsolete in the e-commerce era and should be overturned.
State and local governments could have collected up to $13 billion more in 2017 if they’d been allowed to require sales tax payments from online merchants and other remote sellers, according to a report from the Government Accountability Office, Congress’s non-partisan audit and research agency. Other estimates are even higher. All but five states impose sales taxes.
Online retailers Wayfair Inc., No. 16 in the Internet Retailer 2017 Top 500, Overstock.com Inc. (No. 30) and Newegg Inc. (No. 21) are opposing South Dakota in the court fight. Each collects sales taxes from customers in only some states.
According to Internet Retailer’s Top500Guide.com data, Wayfair collects sales tax in five states (California, Kentucky, Massachusetts, New York and Utah), Overstock collects sales tax in five states (Connecticut, Kentucky, North Carolina, Pennsylvania and Utah) and Newegg collects sales tax in four states (California, Indiana, New Jersey and Tennessee).
The case will also affect Amazon.com Inc. (No. 1), though the biggest online retailer isn’t directly involved. When selling its own inventory, Amazon charges sales tax in every state that imposes one, but about half of its sales involve goods owned by third-party merchants. For those items, the company says it’s up to the sellers to collect any taxes, and many don’t.
The court probably will hear arguments in April with a ruling by the end of its nine-month term in late June.
“We’re confident that as the Supreme Court delves deeper into the issue, it will confirm that the doctrine stated in Quill Corp. v. North Dakota is clear and fair on this matter,” said Jonathan Johnson, president of Overstock’s subsidiary, Medici Ventures Inc., and a member of Overstock’s board of directors. “That said, unless Congress intercedes, under the U.S. Constitution any retailer without a physical presence in South Dakota cannot be required to collect and remit state sales tax.”
Congress has for several years considered various bills that would require all or some online retailers to collect sales tax in states where they have no physical presence, but no bill has made it through both houses. Frustrated with the lack of congressional action, several states have passed bills that explicitly challenged the Quill ruling in hopes of bringing the question of online sales tax back to the U.S. Supreme Court.
E-commerce advocacy group Netchoice tweeted about the court’s decision to review South Dakota’s case:
In the case of South Dakota vs. Wayfair: “It’s not the decision we sought, but we’re glad the nation’s highest court will learn how new state laws are imposing unreasonable tax burdens on out-of-state businesses.” #SCOTUS https://t.co/Qyv2Fm9q6O
— NetChoice (@NetChoice) January 12, 2018
In September, Netchoice executive director Steve DelBianco said, “If the high court takes this case, we will be ready to show that the perspective of a few large online retail defendants is only a small part of the story. In fact, many thousands of smaller businesses would bear disproportionate burdens and costs if they are forced to become tax collectors for 12,000 jurisdictions across 46 states.”
The American Catalog Mailers Association Inc. has filed suits against states that try to force online retailers to collect sales tax when they have no physical presence. “With more than 13,000 different jurisdictions and the addition of sales tax holidays, the situation is even more complex, despite the maturation of the internet. Moreover, regardless of how the court rules, this problem must still be addressed in Congress,” the association said in a statement Friday. “Forcing remote sellers to collect sales taxes in every jurisdiction is like requiring brick and mortar retailers to check the driver’s license of every customer in their store, then applying the correct local sales tax, with the proper and differing product definitions, and remit to the proper jurisdiction using the proper paperwork,” according to ACMA’s statement.
The Retail Industry Leaders Association welcomed the court’s review. “Retailers have supported this case since the beginning, and believe it is the right case to correct the constitutional course set more than 50 years ago—well before the advent of e-commerce—that today gives online-only retailers an unfair commercial advantage at the expense of local retailers,” said Deborah White, general counsel and retail litigation center president.
The Tax Foundation, an independent tax policy nonprofit, also weighed in:
— Scott Drenkard (@ScottDrenkard) January 12, 2018advertisement
The high court’s 1992 Quill v. North Dakota ruling, which involved a mail-order company, said retailers can be forced to collect taxes only in states where the company has a “physical presence.” The court invoked the so-called dormant commerce clause, a judge-created legal doctrine that bars states from interfering with interstate commerce unless authorized by Congress.
South Dakota passed its law in 2016 with an eye toward overturning the Quill decision. It requires retailers with more than $100,000 in annual sales in the state to pay a 4.5 percent tax on purchases. Soon after enacting the law, the state filed suit and asked the courts to declare the measure constitutional.
“States’ inability to effectively collect sales tax from internet sellers imposes crushing harm on state treasuries and brick-and-mortar retailers alike,” South Dakota said in its Supreme Court appeal.
Wayfair, Overstock and Newegg said the court should reject the appeal and leave it to Congress to set the rules for online taxes.
“If Quill is overruled, the burdens will fall primarily on small and medium-size companies whose access to a national market will be stifled,” the companies argued. “Congress can address this issue in a balanced and comprehensive manner through legislation.”
Three current justices—Clarence Thomas, Neil Gorsuch and Anthony Kennedy—have expressed doubts about the Quill ruling. Kennedy said in 2015 that Quill had produced a “startling revenue shortfall” in many states, as well as “unfairness” to local retailers and their customers.
“A case questionable even when decided, Quill now harms states to a degree far greater than could have been anticipated earlier,” Kennedy wrote. “It should be left in place only if a powerful showing can be made that its rationale is still correct.”
Gorsuch, the newest Supreme Court justice, suggested skepticism about Quill as an appeals court judge. And Thomas has said he would jettison the entire dormant commerce clause, saying “it has no basis in the Constitution and has proved unworkable in practice.”
Amazon backs a nationwide approach that would relieve retailers from dealing with a patchwork of state laws. Amazon once relied on the Quill ruling and didn’t collect sales tax at all; the company gradually changed its position as it built warehouses all over the country, giving it a greater physical presence in multiple states.
The case is South Dakota v. Wayfair, 17-494.