WASHINGTON – State governmental groups are predicting there will be a smooth transition regardless of the outcome of a high stakes e-commerce sales tax case involving billions of dollars of revenue for states, which the U.S. Supreme Court is expected to rule on later this month.
The e-commerce retailers that are the defendants in South Dakota v. Wayfair, Inc. estimated there’s as much as $100 billion in state and local sales tax at stake, South Dakota Attorney General Marty Jackley told the high court’s justices during his oral argument in April.
“There’s this idea that there will be chaos out there after a decision, but we don’t think so,” Max Behlke, director of budget and tax policy for the National Conference of State Legislatures, told reporters during a briefing on Friday.
Tax administrators will consult with governors and governors, in turn, will consult with their legislatures before responding to any of several possible rulings by the court, officials said.
“All we want is something that makes sense,” said Verenda Smith, deputy director of the Federation of Tax Administrators.
The case stems from a law that South Dakota passed in 2016 that required out-of-state retailers that made at least 200 sales or sales totaling at least $100,000 to collect sales taxes. The state eventually sued several retailers that failed to comply. South Dakota’s state courts ruled for the retailers, deeming themselves “duty bound to follow” the U.S. Supreme Court’s 1992 ruling in Quill Corp. v. North Dakota, which upheld earlier rulings requiring the physical presence of a retailer before a government could require the collection of sales taxes on online purchases. Now South Dakota is challenging that ruling's reliance on the “physical presence” standard set in the Quill case.
Many state and local officials are expecting the high court to overturn the Quill ruling. The question they have is what new standard the justices will select for an economic nexus that allows sales taxes to be levied.
The physical presence standard has had problems for a number of years, Smith said, noting that for decades some jewelry stores were able to circumvent sales taxes by shipping an expensive in-store purchase to an out-of-state destination. A customer might even take the jewelry home and the retailer would ship an empty box.
If the court simply upholds South Dakota’s standard, more states may enact similar laws requiring e-commerce retailers to collect sales tax on behalf of the state if they have more than 200 transactions annually or $100,000 in sales. Indiana, Maine and Wyoming already have done that.
That threshold, however, could be a problem for larger states such as California and New York.
Even if Quill is upheld, states could pursue other options.
The Supreme Court has chosen to not review a federal appellate court decision that upheld a Colorado law enforcing so-called use taxes, which requires e-commerce companies to report to the state on people who have made a large amount of out-of-state purchases over the course of a year. Colorado can use that data, in turn, to persuade residents to pay the sales tax on those purchases.
Another option for states is to enact what Pennsylvania and Washington have, a so-called marketplace facilitator collection law requiring major e-commerce websites to collect sales tax for third party sales.
Those laws not only affect Amazon, which does 40% to 60% of its sales through third parties, but other e-commerce giants such as eBay, Walmart and Etsy.com.
Minnesota joined those two states in adopting a similar requirement that will become effective on July 1, 2019.
Another possibility for the high court is to remand the South Dakota case to the lower court in order to have the state and the e-commerce retailers involved in the case determine the burden of compliance. That would allow the high court to reconsider the case after a factual record is established.
Several of the Supreme Court justices complained during oral arguments that they didn’t have enough information about what might be a suitable new economic nexus to replace the physical standard without imposing an undue burden for compliance.
The 1992 ruling was made in connection with out-of-state catalog retailers before the Internet marketplace existed.
The South Dakota case represents an opportunity for the court update its ruling in light of the role of e-commerce now plays.
South Dakota has no state income tax and relies significantly on sales tax revenue to operate its state government, making it what many consider to be an ideal candidate for the court to consider.
South Dakota is one of 15 states that received more than 40% of their general fund revenue in 2017 from sales taxes, according to John Hicks, executive director of the National Association of State Budget Officers. The others are Arizona, Florida, Hawaii, Idaho, Indiana, Kansas, Louisiana, Maine, Mississippi, Oklahoma, Tennessee, Texas, Washington and Wyoming.
A total of 45 states have sales taxes. NASBO estimates that about 31% of state tax revenues come from sales taxes.
Among the five states without statewide sales taxes, Alaska has numerous municipalities that levy local sales taxes.