Supreme Court takes up battle between states, web retailers over sales tax

Retail websites could soon be ordered to collect sales taxes on all merchandise sold.

Lawyers representing South Dakota will ask the Supreme Court Monday to overturn a decades-old law that says states can’t require a merchant to collect a sales tax if that merchant has no physical presence within the state’s boundaries.

In court briefs, South Dakota argues the rule is “unworkable” or “outdated” and “States’ inability to effectively collect sales tax from internet sellers imposes crushing harm on state treasuries and brick-and-mortar retailers alike.”

Retailers, however, argue that the issue should be decided by Congress and not the courts.

“The very purpose of the Commerce Clause was to ensure a national economy free from such unjustifiable local entanglements,” they wrote in court documents. “Under the Constitution, this is a domain where Congress alone has the power of regulation and control.”

Amazon, which did not join the case, collects sales taxes in 45 states and the District of Columbia but only on their own items; it does collect sales tax on items sold through third-party vendors.

Kimberly Jansen, a partner at Hinshaw & Culbertson LLP, gives her analysis on South Dakota v. Wayfair.

Many states, though not all, impose a sales or use tax on the sale of goods or services. Typically, states require the retailer to collect the tax from consumers at the time of the transaction and remit the amount collected to the state.

The difficulty comes when an out-of-state retailer makes a sale to in-state consumers. Can a state require an out-of-state retailer to collect the sales tax on behalf of the state? Historically, and considered in the context of mail-order retailers who shipped goods from out-of-state to in-state consumers, the answer was a firm “no.”

The issue was directly addressed most recently in Quill Corp. v. North Dakota in 1992. In Quill, the Supreme Court reaffirmed that the dormant commerce clause prohibits a state from requiring an out-of-state retailer to collect and remit a state sales tax if the retailer has no physical presence there.

Frustrated with the impact of Quill on their revenue collection, states then got a boost from Justice Anthony Kennedy in 2016. In a separate concurring opinion in Direct Mktg. Ass’n v. Brohl, Justice Kennedy criticized Quill and suggested the time had come for a case that would allow the Court to reexamine its holding in Quill.

That same year, South Dakota followed Justice Kennedy’s suggestion by passing a law that would require any retailer transacting more than $100,000 in business in South Dakota or making more than 200 sales to consumers there to collect and remit the South Dakota sales tax; it didn’t matter, according to the new law, whether the retailer had a physical presence in the state.

South Dakota then promptly filed a declaratory judgment action seeking a determination of the statute’s validity. Following Quill, South Dakota courts concluded that the new law violates the commerce clause.

The Supreme Court granted certiorari to re-examine Quill.

The Court is being asked to decide whether the physical presence requirement embraced in Quill remains an appropriate test in the new age of the internet.

For the average American, the potential significance of this case is simple: if the Supreme Court overrules Quill, consumers will no longer be able to take advantage of those “sales tax-free” purchases on the internet.

Many retailers already collect state sales taxes, either voluntarily or because they have a physical presence in-state, so this impact might not be as noticeable to consumers as it was when internet commerce was new and seemingly few sales included state sales taxes.

Many states believe the outcome of the case could have a substantial impact on state revenues. Overruling Quill, these states believe, will allow them to collect billions of dollars in sales tax that would otherwise remain uncollected under the rule in Quill.

But retailers believe that overruling Quill will force retailers to comply with thousands of complex and variable state and local sales tax regimes. That burden, they urge, will fall most heavily on small businesses.

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