Supreme Court Expected to Weigh Tech Progress in Online Sales Tax Case

At stake is 1992's Quill v. North Dakota, which established that the Constitution’s commerce clause can prevent states from collecting sales tax from out-of-state retailers. With more than 6,000 sales and use tax jurisdictions across the country, the high court said the tax system is too complicated for a seller to know what to collect. However, given “changes in technology and consumer sophistication,” Justice Anthony Kennedy invited Quill opponents to bring a new case in March 2015. The Supreme Court could potentially decide Wayfair by the end of June.

South Dakota and Colorado are among some 40 states and territories seeking a Quill reversal, while Montana and New Hampshire support retailers Wayfair, Overstock and Newegg. The case also divided members of Congress, with Rep. Bob Goodlatte, R-Va., and others asking the court to defer to legislative efforts. Sens. Heidi Heitkamp, D-N.D., Lamar Alexander, R-Tenn., and others argued in favor of South Dakota.

The National Retail Federation said online retailers have an unfair price advantage over brick-and-mortar shops, given sales tax collection discrepancies. That’s in addition to advantages of scale and low overhead costs, said Vice President-Government Affairs Public Relations Craig Shearman. With advances in technology, free and reasonably priced software is now available for online retailers to calculate tax collection by jurisdiction based on customer ZIP codes, he said.

Americans for Tax Reform Federal Affairs Manager Katie McAuliffe, whose group supports Wayfair, said a Quill reversal would further cement Amazon’s control of the online retail market. The e-commerce giant is physically present and subject to sales taxation in almost all 50 states, and a reversal will expose smaller retailers to a wider range of collection, she said. In 2016, South Dakota knowingly passed a sales tax collection law it knew would violate Quill, which forced the Supreme Court into a legislative role, she added.

Computer & Communications Industry Association Vice President-Law and Policy Matt Schruers, who prepared the group’s brief in favor of Wayfair, agreed justices will consider the burden of retailer compliance. If the burden remains high, South Dakota will have a harder case to make, he said. Another area to watch is the issue of consequence from a potential reversal, Schruers said. CCIA objects to DOJ’s stance that virtual presence of websites amounts to physical presence in states. That's a “baffling” argument, Schruers said, since the U.S. government resisted extraterritorial application of foreign laws on content moderation and taxation. It’s also “peculiar” the Trump administration is taking a “pro-tax” position, he said. Expect the Trump administration to argue that Quill should protect mail-order businesses only, and not online sales, said NetChoice CEO Steve DelBianco: “While the president may want to penalize Amazon, and make mail order great again, Congress has made it illegal to discriminate against internet sales.”

James Sutton, state and local tax chairman for the American Academy of Attorney-Certified Public Accountants, noted the 23 amicus briefs in support of Wayfair, including his group’s. A reversal of Quill would be a boon for his group's members, but the group's “acting against our own best interests,” he said. “We think it’s bad for the country, so we’re taking the contrarian position and saying this isn’t good for our client. This isn’t good for business, the U.S. economy, to open up state jurisdiction.” Online Merchants Guild Chairman Paul Rafelson said there's strong sentiment the court should overturn the physical presence requirement, but the court needs to recognize individual sellers deserve reasonable protection from what Sutton described as states’ “hungering greed for money.”

An often-cited document in the case is the GAO’s November report, which said states and local governments can currently collect between 75 percent and 80 percent of taxes that have supposedly been lost due to Quill. South Dakota’s brief estimated $33.9 billion in lost sales-tax revenue for states annually because of Quill, while GAO estimated all state and local taxing entities could have collected between $8 billion and $13 billion in 2017 if remote sellers were required to collect sales taxes.

Congress has unsuccessfully tried for 15 years to pass legislation. Sen. Michael Enzi, R-Wyo., introduced the Marketplace Fairness Act (S-976) last year, but the most current bill is the Remote Transaction Parity Act (HR-2193) from Rep. Kristi Noem, R-S.D. HR-2193 is meant to “create a level playing field so Main Street stores and online retailers can compete fairly.”