The Supreme Court's options in e-commerce sales tax ruling
WASHINGTON – State and local governments face three possible outcomes from the soon-to-be-issued Supreme Court ruling in the e-commerce case, South Dakota v. Wayfair, Inc., ranging from the status quo to easier access to billions of dollars of untapped sales tax revenue.
The status quo is considered the least likely outcome because it would require the high court to uphold the standard – that a retailer must have a physical presence in a state – that it set in its 1992 ruling in Quill Corp. v. North Dakota that exempted an out-of-state catalog retailer from collecting sales tax.
The reason the justices took this case involving a South Dakota law designed to collect sales taxes from purchases over the internet is that at least some of them agreed it was time to reconsider that earlier standard.
The physical presence standard is “antiquated,” said Gregory Matson, executive director of the Multistate Tax Commission.
If Quill is overturned, Matson said, “The states can work on figuring out, like the South Dakota statute, an appropriate threshold.”
South Dakota's law, which is being litigated, would require e-commerce retailers to collect sales tax if they had more than 200 transactions annually or $100,000 in sales within the state.
The implementation would be gradual with governors consulting with their state legislatures on how to proceed.
“I think we can get down to straightforward consistent tax administration and where you’ve got thresholds set up and what I would say is continued effort at real simplification to make the burdens on interstate commerce as minimal as possible,” Matson said.
The third option – which might appeal to the justices if they are otherwise divided -- is to send the case back to a state court with instructions for closely examining at what point it would be an undue burden on an e-commerce retailer for a state or local government to require collection of sales taxes.
For governments the stakes in this case are worth billions of dollars no matter which of several varying estimates of revenue losses is the correct one.
The U.S. Government Accountability Office said in December that 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.
“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 have estimated the lost sales tax revenue will grow to $33.9 billion this year.
The coalition’s estimate assumes that e-commerce sales will continue to grow 15% annually while the non-e-commerce share of remote sales will continue to grow 5% annually.
The scope of the problem has narrowed as the number of large online retailers that collect sales taxes, such as Amazon, has grown.
A friend of the court brief filed on behalf of Rep. Bob Goodlatte, R-Va., said 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” if Congress is allowed to resolve the issue.
The state with the most at stake in the pending Supreme Court ruling in terms of reliance on sales tax is Florida, which collected 77.9% of its general fund revenues from sales taxes in 2017, according to data provided by the National Association of State Budget Officers.
South Dakota was second at 60.6%, followed by Tennessee at 59.8%, Texas at 55.5% and Washington at 51.5%.
Another 10 states collected between 40% and 49% of their 2017 revenue from sales taxes, NASBO found. In addition to those top 15 states, another 12 collected between 37.8% and 30.7% of their general fund revenues from sales taxes.
The GAO report found smaller states are impacted more by the loss of sales taxes from e-commerce because they have less of a presence of major retailers.
Only five states – Alaska, Delaware, Montana, New Hampshire and Oregon – don’t levy general sales taxes statewide. Alaska has 107 jurisdictions, however, that levy sales taxes, including the city of Juneau.
Sales tax revenues are an important stable revenue source for states that’s less volatile than personal income tax revenues, according to NASBO.
Legal experts and government officials who once were confident that a majority of the nine high court justices would rule in favor of the states and local governments aren’t as certain of that outcome because of questions raised by the justices during oral arguments in the South Dakota case.
Justice Stephen Breyer said during the April 17 oral arguments that the briefs on both sides presented convincing arguments.
Other justices questioned whether there was enough of a record in the case for them to establish a new standard.
The problem is that the case before the court has been on a fast track without much consideration of the practicality of the state law that was invalidated.
The state is appealing a state court ruling in favor of e-commerce retailers Wayfair, Overstock and Newegg which invalidated the 2016 South Dakota law that is based on a certain number of annual transactions of sales within the state.
Experts say the worst outcome for state finances would be for the high court to uphold its 1992 ruling in the Quill case that upheld earlier rulings requiring that the physical presence of a retailer is required before a government can require the collection of sales taxes.
The Quill ruling came before the internet marketplace existed.
But even if Quill is upheld, experts expect a status quo in which states to continue to enact laws that workaround the physical presence standard and additional large e-commerce companies to join Amazon in voluntarily collecting sales tax.
Those workarounds include a Colorado law that imposes a reporting and notice requirement on out-of-state e-commerce retailers to report its in-state customers to the state on an annual basis.
The Colorado law was upheld by the U.S. Court of Appeals for the Tenth Circuit.
Matson predicted more states will enact similar laws if Quill is upheld. “We’ve done a model law that states could use to pick that up,” he said.
Other states have taken different approaches. Massachusetts has a “cookie” law that treats a cookie placed on a computer hard drive by an e-commerce retailer as physical presence.
New York has a “click-through nexus" statute that imposes collection and reporting duties on remote retailers who market their products using in-state affiliates, including through websites that link to the seller’s website.
And if the justices uphold Quill, they are likely to repeat their advice from that 1992 ruling that the issue would be best handled by Congress.
Congress has two bills – the Senate’s Marketplace Fairness Act and the House’s Remote Transactions Parity Act – that 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.