WASHINGTON — The Supreme Court takes up an e-commerce sales tax case on Tuesday involving South Dakota with billions of dollars of annual revenue at stake for state and local governments around the nation.

The defendants are online retailers Wayfair, Overstock and Newegg, which argue the issue involves interstate commerce and should be decided by Congress rather than the courts.

“The appropriate approach should be one that provides a balanced solution—simplification of sales tax administration in return for expanded state tax authority,” they said in a recent brief. “Congress has the means to craft such legislation and is actively considering such measures.”

The U.S. Supreme Court's decision in Murphy v. National Collegiate Athletics Association opens the door for gaming that could impact state and locality bottom lines nationwide.
The U.S. Supreme Court's decision in Murphy v. National Collegiate Athletics Association opens the door for gaming that could impact state and locality bottom lines nationwide. Brian Tumulty, The Bond Buyer

South Dakota has no state income tax and relies on sales and use taxes for much of its state revenue. The state wants the Supreme Court to overturn its 1992 ruling in Quill Corp. v. North Dakota that upheld earlier rulings limiting states and localities to collecting sales taxes from retailers with a physical presence in their jurisdictions.

The 1992 ruling involved mail-order catalogs at a time when public usage of the internet was in its infancy.

South Dakota Attorney General Marty Jackley filed a brief representing the petitioner, the state of South Dakota, responding to the brief filed by Wayfair, Overstock and Newegg, who are the defendants in the case.

Jackley filed argued that the e-commerce retailers have not presented a persuasive reason for keeping the physical presence standard.

Instead, they have presented “an extended tax-policy argument that it remains too hard for e-commerce retailers to collect local sales taxes,” Jackley’s brief said. “This is a non sequitur: Respondents do not attempt to explain how physical presence limits—or even relates to—the compliance costs they decry.”

Jackley’s brief, filed on behalf of South Dakota, cites a comment made by Supreme Court Justice Neil Gorsuch when he was a judge on the U.S. Court of Appeals for the Tenth Circuit.

Gorsuch said that states are free to impose equal or greater compliance burdens through other taxes, or under regimes requiring sales-tax reporting rather than collection, according to Jackley.

State and local governments have been united in backing South Dakota’s effort to overturn Quill. A friend-of-the-court brief in support of South Dakota was filed by more than a dozen state and local government groups led by the National Governors Association and the National Conference of State Legislatures that includes mayors and public education associations.

State and local governments said in their brief the South Dakota case offers the “cleanest” opportunity for the court to rule.

State and local governments could have gained an additional $8 billion to $13 billion in sales tax revenue in 2017 if they had authority to require sales tax collection from all remote sellers, the U.S. Government Accountability Office said in a report released in December.

“This is about 2% to 4% of total 2016 state and local government general sales and gross receipts tax revenues,” GAO said.

Other groups have much higher estimates. NCSL and the International Council of Shopping Centers estimated states and local governments lost $26 billion in tax revenue in 2015 from online retail sales.

The Marketplace Fairness Coalition of major brick-and-mortar retailers, local chambers of commerce and commercial real estate firms has estimated the lost sales tax revenue will grow to $33.9 billion this year.

The coalition’s estimate assumes that e-commerce will continue to grow 15% annually and the non-e-commerce share of remote sales will continue to grow 5% annually.

Wayfair and the other e-commerce retailers said in their most recent court brief that the GAO estimate is more accurate because the largest e-commerce retailers “already collect the tax at rates approaching brick-and-mortar sellers.”

“The GAO found tax collection among the top 100 Internet retailers is between 87% and 96%,” the e-commerce retailers said. ”The so-called non-collectors are primarily small and medium-size companies, especially start-ups and regionally remote businesses for whom the Internet has enabled access to a national marketplace. Imposing the disparate requirements of 12,000 tax jurisdictions on such companies would effectively be a barricade across the Internet superhighway for thousands of companies.”

A bipartisan effort by some lawmakers in Congress to address the problem through legislation has been thwarted by House Judiciary Chairman Bob Goodlatte, R-Va.

Two bills — the Senate’s Marketplace Fairness Act (S. 976) and the House’s Remote Transactions Parity Act (H.R. 2193) — would require e-commerce retailers to collect sales tax based on the location of the purchaser. The bills also would require states to either join the Streamlined Sales and Use Tax Agreement compact or agree to implement certain sales tax simplification measures.

Goodlatte has joined Democratic Rep. Anna Eshoo of California in a proposed alternative.

Their Online Sales Simplification Act (OSSA), released in 2016, remains only a draft and has not been released as proposed legislation.

Goodlatte said he’s been thwarted in finalizing a compromise because states that want to see the 1992 Quill decision overturned are awaiting a Supreme Court ruling.

A brief filed with the Supreme Court on behalf of Goodlatte said that 17 of the top 18 online retailers “have already begun collecting sales tax on both online and in-store sales,” making the issue “less difficult to solve through legislation.”

Twenty-three states have adopted the streamline sales tax compact which minimizes the cost of compliance by out-of-state retailers by providing for administration of collection at the state level, simplification of tax rates and uniformity of the definition of which merchandise is taxable.

But even if the federal legislation is enacted, other problems will remain.

Pennsylvania, along with New Mexico, has a state law that requires “origin-sourcing,” which means a retailer must have a physical presence in a jurisdiction in order to be able to collect sales tax. Amazon does not have any fulfillment centers in Philadelphia or Allegheny County, which includes Pittsburgh.

Amazon is remitting the statewide sales tax it collects to state governments, but there are obstacles to getting the local share to the cities and counties which have local levies in several states.

Alaska, for instance, does not have a statewide sales tax, so there is no mechanism at the state level for collecting or distributing sales tax revenue to the 107 jurisdictions, such as the city of Juneau, that do have one.

“Overturning Quill will be the first step in allowing state and local governments to collect the billions in owed tax dollars from internet retailers,” Amanda Kellar, associate counsel and director of legal advocacy for the International Municipal Lawyers Association, said recently in an interview. “But after that hopefully happens, there still may need to be legislative solutions either by Congress or in individual states to help local governments collect tax revenue.”

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