WASHINGTON — A final resolution of whether states and local governments can force the collection of sales taxes from online transactions is expected by late June now that the Supreme Court has set an April 17 date to hear oral arguments in a case on the issues.
The case is South Dakota v. Wayfair, which governors and mayors around the nation are hoping will overturn the court’s 1992 ruling in Quill Corp. v. North Dakota, 504 U. S. 298, 311 that upheld earlier rulings limiting states and localities to collecting sales taxes from retailers that have 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, which has no state income tax and relies on sales and use taxes for much of its state revenue, filed its 79-page brief in the case Monday arguing that the 1992 ruling is outdated.
“Amazon.com did not begin selling books out of Jeff Bezos’s garage until July 1995; even five years after Quill, Bezos himself described Amazon as ‘a pipsqueak in comparison’ to Barnes & Noble,” South Dakota said in its brief.
But the e-commerce world of 2018 is different.
“In the digital age where ubiquitous e-commerce is projected into our homes and smartphones over the internet, traditional ‘physical’ presence is an increasingly poor proxy for a company’s ‘nexus’ with any given market or state,” South Dakota said. “Internet retail now makes it possible to do billions in business in a forum without having a strictly ‘physical’ presence there, while also interacting far more pervasively— and being much more ‘present’ —than catalog mailers ever were.”
Moreover, South Dakota said that e-commerce retailers can easily comply with sales tax collection by using readily available web-based software that also process credit card transactions. “Accordingly, there are now a host of tax-compliance providers with programs that interface directly with e-commerce sites and automate the entire sales tax process,” the state said.
State and local governments have been united in the 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.
That brief said the South Dakota case offers the “cleanest” opportunity for the court to rule.
“Quill stands as the single greatest obstacle to meaningful sales tax reform in today’s digital economy,” the groups' brief said. “Decided before the massive expansion in online retail, Quill has caused states and local governments to lose billions in annual sales and tax revenue, “inflicting extreme harm and unfairness on the states.”
State and local governments could have gained an additional $8 billion to $13 billion in sales tax revenue in 2017 if they had been given 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. The National Conference of States Legislatures 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 ecommerce will continue to grow 15% annually and the non-ecommerce share of remote sales will continue to grow 5% annually.
Efforts in Congress to resolve the issue through legislation have been stalled because some key lawmakers such as House Judiciary Committee Chairman Bob Goodlatte, R-Va., oppose overturning Quill.
Republican Rep. Kristi Noem of South Dakota, whose bipartisan legislation could resolve the issue, did not try to attach her bill to the tax overhaul legislation enacted in December.
Noem’s Remote Transactions Parity Act (H.R. 2193) would allow states to require remote sellers to collect sales taxes within their jurisdictions and require states to provide free software for those businesses to calculate the sales taxes.
Noem’s office said Tuesday that supporters of her bill believe the legislation should be enacted before the Supreme Court acts.
“Waiting until the Court acts is shortsighted,” said Noem’s spokeswoman, Brittany Comins. “If the court overturns Quill, as expected, state taxing authority will be unleashed. Most states currently support legislative action, but with Quill gone, you can bet they will oppose any legislation that would limit their new authority. “