The Supreme Court of the United States has announced that it will hear arguments in a case concerning states’ constitutional ability to require online-only, out-of-state retailers to collect and remit sales taxes owed by in-state purchasers on goods they buy.
According to the Wall Street Journal, “The justices agreed to hear an appeal by the state of South Dakota, which has been pushing a test case with the goal of overturning a high-court precedent that limits states’ sales tax collections.”
Although the broad perception is that state laws targeting online retailers for sales tax collection are aimed at e-commerce behemoth Amazon, in fact the South Dakota suit targets Wayfair Inc., Overstock.com Inc. and Newegg Inc., defendants in the case.
South Dakota’s case is strongly supported by a wide array of other states– perhaps surprisingly, mostly conservative, red ones.
That’s because under existing law, while the Quill v North Dakota decision bars states from mandating that the likes of Wayfair collect and remit taxes on sales to those states’ residents, taxes owed on the sales are in fact legally owed already by in-state purchasers. It’s just that the overwhelming majority of purchasers never pay the tax, which has red states fuming. Frequently, they have relatively high social spending needs, and are very reliant on sales taxes as a source of revenue– so a declining revenue base like they have seen as e-commerce has become the norm represents a real cashflow problem for them.
Alabama, Tennessee and Mississippi have all been prime movers in the drive to force the Supreme Court to re-examine the issue. They want the Quill decision barring them from imposing collection and remittance obligations overturned.
Some conservatives argue that Quill should be “flipped,” on federalism grounds, and on the grounds that what once constituted an excessively burdensome obligation (collecting and paying up taxes owed in every U.S. jurisdiction) has become a far easier one with which to comply, thanks to the advent and accessibility of software enabling retailers big and small to accurately calculate sales taxes owed by different buyers, and the ease of moving money via online banking and modern payment processing.
However, opponents argue that if Quill is overturned, there will be nothing to prevent states from treating Mom and Pop operations selling online like an e-tail giant like Wayfair, and that audit and compliance burdens could result in bigger retailers gaining further market share as small players opt out of the retail sector due to burdens that SCOTUS may not deem excessive, but which feel excessive or unmanageable to them.
Rep. Kristi Noem and other Republicans in Congress have advocated for a federal legislative solution to the problem, with some Republican leaders calling for a bill that would allow states to make big players like Wayfair, Overstock and Newegg pay up, but would exempt smaller sellers from collection and remittance requirements as well as audits and other compliance-oriented regulations.
Observers say that SCOTUS is likely to flip the Quill decision, because Justice Anthony Kennedy signaled several years ago that he thinks circumstances key to that decision have now changed, and because Justice Neil Gorsuch is believed to side with the states on the issue.
The Los Angeles Times recently speculated that Justice Clarence Thomas would also vote to reverse the Quill decision, given his specific views on what is known as the “negative commerce clause,” a factor in the Quill decision.
If that were to occur, it would deliver a minimum 7-2 decision in favor of reversing the Quill judgment, and would upend decades of tax law relating to remote sales. More importantly, though, in the absence of legislation from Congress, it could mean steep tax collection, remittance, audit and compliance requirements for lots of smaller businesses across the U.S.
Noem’s bill appears to address that concern. She has said that President Trump has promised to get it passed and signed this year, perhaps a small relief to some retailers fearing a reversal of judicial precedent on this matter– though not Wayfair, Overstock or Newegg, who would still be on the hook.