WASHINGTON – The U.S. Supreme Court’s announcement that it will hear a South Dakota case this spring involving the collection of sales taxes from online retail sales is expected to break the current gridlock on an issue that has divided members of Congress.
The court’s announcement Friday it will hear arguments in South Dakota v. Wayfair had been widely expected as an opportunity to revisit its 1992 ruling in Quill Corp. v. North Dakota.
The Quill ruling limited states and localities to collecting sales taxes from retailers that had a physical presence in their jurisdictions.
State and local governments could have gained an additional $8 billion to $13 billion in sales tax revenue in 2017 if they were given authority to require sales tax collection from all remote sellers, the U.S. Government Accountability Office said in a report released last month.
“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 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.
“The need for legislative action on e-fairness is more urgent than ever before,” Republican Rep. Kristi Noem of South Dakota said in statement Friday after the Supreme Court announced it would consider the South Dakota case.
“If the Supreme Court rules in South Dakota’s favor, it could become a marketplace free-for-all,” Noem said. “A South Dakota small business, for instance, could be forced to comply with 1,000 different tax structures nationwide without the tools necessary to do so. My legislation provides a necessary fix.”
Noem’s bipartisan Remote Transactions Parity Act (H.R. 2193) would allow states to require remote sellers to collect sales taxes within their jurisdictions and also require states to provide free software for those businesses to calculate the sales taxes.
Noem was among a bipartisan group of senators and House members who filed a friend-of-the-court brief with the high court urging it to consider the South Dakota case.
“Given the built-in, indeed intended, difficulties in enacting federal laws, the current Quill determined status quo places a very large thumb on the scales on the side of out-of-state sellers,” the brief said. “This is especially problematic on federalism grounds because the states are being forced to surmount these hurdles in order to obtain permission from the federal government to use their own taxing powers.”
Noem and the other lawmakers argued that a decision overturning Quill would make it easier for Congress to act.
A different group of House lawmakers and senators submitted a competing brief urging the nine Supreme Court justices to not take the case. House Judiciary Committee Chairman Bob Goodlatte, R-Va., led this group. Goodlatte, who has been an opponent to Noem’s bill, has joined to Democratic Rep. Anna Eshoo of California in a proposed alternative.
Their Online Sales Simplification Act (OSSA) 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.
Meanwhile, the brief filed on behalf of Goodlatte noted 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.”
Goodlatte reacted to Friday’s announcement by the Supreme Court in a press statement expressing his hope the court “will uphold the bright-line physical presence test, so that businesses will continue to be regulated only by their own state and local legislatures and not those of their competitors.”
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 NCSL 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.
In September the South Dakota Supreme Court overturned a 2016 state law requiring online merchants with more than $100,000 in sales or 200 transactions with state residents to collect sales taxes. The court said the state cannot require out-of-state sellers to collect sales taxes.
“Quill stands as the single greatest obstacle to meaningful sales tax reform in today’s digital economy. 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," NGA, NCSL and the other groups said.