WASHINGTON -- South Dakota has filed an appeal asking the U.S. Supreme Court to overturn a ruling by the state's highest court that invalidated a law requiring online retailers to collect sales tax.

The petition, which had been expected, was announced Monday by South Dakota Attorney General Marty Jackley.

Federal agencies have until May 10 for a final appeal with the U.S. Supreme Court, but CLO industry observers do not expect the Fed or the SEC to follow through.
Three of the nine justices on the Supreme Court — Justices Anthony Kennedy, Clarence Thomas and Neil Gorsuch — have said online sales taxes need to be reviewed in light of technological advances.

The case is widely viewed as an opportunity for the Supreme Court to take into account technological advances since its 1992 ruling in Quill Corp. v. North Dakota, that sales tax collections for online sales could only be required if a retailer had a physical presence or “nexus” in a state.

“The physical-presence exception for sales-tax collection duties is causing serious harms this Court could not have foreseen when it decided Quill in 1992,” South Dakota’s petition said. “Those harms fall in three places: on the States, which are deprived of critical revenue; on brick-and-mortar retailers, who are deprived of a level playing field; and, ironically, on the very interstate commerce Quill aimed to protect.”

South Dakota has no state income tax and is more reliant on sales taxes for its budget than most states.

A 2016 South Dakota law requires out-of-state retailers to collect and remit the sales tax similar to in-state retailers if the remote sellers have more than $100,000 in sales or complete more than 200 sales transactions per year within South Dakota.

After the law was enacted, the state contacted large remote retailers asking them to comply. The state then sued three that refused, resulting in the lawsuit, State of South Dakota v. Wayfair, Overstock and Newegg. South Dakota’s highest court overturned the law last month, setting the stage for the appeal.

States and local governments lost an estimated $26 billion in potential sales tax revenue in 2015 because of online retail sales, according to the National Conference of State Legislatures and the International Council of Shopping Centers.

The Marketplace Fairness Coalition of brick-and-mortar retailers, local chambers of commerce and commercial real estate firms estimates the lost sales tax revenue will grow to $33.9 billion in 2018.

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.

The burgeoning growth of internet retail sales has led to budget shortfalls in many states.

“It is thus no surprise that states are feeling the squeeze,’’ South Dakota said in its petition to the court, noting that 33 faced revenue shortfalls in 2017 and six had no budgets in place at the start of their fiscal year this July.

Amazon, the nation’s largest e-commerce retailer, began collecting sales taxes in April but does not do it for third-party sellers who use its site.

Efforts by state and local governments to persuade Congress to enact legislation to mandate sales tax collection for internet sales have been unsuccessful.

“It is no answer to hope (as Quill did) that Congress might ‘fix’ the problem created by this Court’s own doctrine by devolving power back to the States,’’ South Dakota’s petition said. “The damage to the Framers’ design is done when the States must go begging to Congress for powers that belong to them by right, as 25 years of congressional inaction on this issue have vividly shown.”

The National Governors Association are other groups are expected to join the in the appeal by filing friend-of-the-court briefs.

Most petitions to the high court are turned down, but three of the nine justices on the court –- Anthony Kennedy, Clarence Thomas and Neil Gorsuch -- have said online sales taxes need to be reviewed in light of technological advances.

“Given these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the court’s holding in Quill,’’ Kennedy wrote in a 2015 ruling involving a Colorado case . “A case questionable even when decided, Quill now harms states to a degree far greater than could have been anticipated earlier.’’

Justice Neil Gorsuch, who was confirmed as a Supreme Court justice by the Senate earlier this year, was involved in the same Colorado case at the federal appellate court level. In writing his opinion, Gorsuch referred to the Quill decision as a “precedential island’’ that will “wash away with the tides of time.’’

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