Much at Stake in U.S. Supreme Court Online Sales Tax Case

Today, the Supreme Court of the United States (SCOTUS) will hear oral arguments in South Dakota v. Wayfair. Wayfair Inc., Overstock.com and another online retailer challenged a South Dakota law that calls for them to collect South Dakota’s sales tax on their sales to South Dakota residents, even though the companies have no physical operations or physical presence in the state.

The online retailers’ position is supported by precedent. Over 50 years ago in National Bellas Hess Inc. v. Department of Revenue of Illinois (1967), SCOTUS found, based on Commerce Clause protections, that Illinois could not require an out-of-state business to collect its sales tax unless the business had a “physical presence” in Illinois.
This “physical presence” test was affirmed in Quill v. North Dakota (1992) when the Court ruled that North Dakota could not require a mail order company to collect its sales tax, again citing the requirement as an unreasonable burden on interstate commerce. But the Court’s opinion seemed to acknowledge that different circumstances could yield different results.

And much has changed since 1992. Most notably, the internet was only in its infancy then and online retailers were unheard of. The application of Quill to a transaction and industry that barely existed when the opinion was issued has generated growing debate over the last 10 to 15 years. Pressure to overturn Quill has steadily grown as internet sales swallow up a larger market share each year, traditional brick-and-mortar retailers see their profits decline, states see their revenues decline and the “burden” associated with collecting the taxes has been steadily lessened by technological advances.

Congress has the authority to legislatively overturn Quill but countervailing political forces have impeded it from remedying the situation. Consequently, states have legislated an array of their own remedies, in the form of imaginative and constitutionally suspect laws. As part of a concerted effort across the country, advocates for overturning Quill began a campaign designed to present a new basis for testing the Quill holding.

It encouraged states to impose laws they knew would be challenged, in order to get a fresh case before the Supreme Court and give them the opportunity to argue Quill’s legal obsolescence. The laws would purport to establish legal nexus based on the level of sales that online businesses conduct in their state. This concept is referred to as “economic nexus”.

In comes South Dakota – the first state to pass legislation imposing the collection requirement based on a defined economic nexus. If an online seller has more than $100,000 in sales or more than 200 separate sales to South Dakota residents, then that retailer must collect the sales tax in those transactions. The South Dakota law served as the model as a few other states passed nearly identical legislation, including Indiana (in 2017). South Dakota fast-tracked the litigation and here we are with a potential landmark case before SCOTUS.

Will Quill be overturned? It seems very possible. First, the Court took the case which could be interpreted as a recognition that the issue needs to be revisited. Second, three justices have questioned the application of the Quill case. And many stakeholders have presented legal arguments to support and encourage the Court to reach an updated result. Forty amicus curiae (friend-of-the-court) briefs have been filed since the Court decided to hear the case in January.

These include briefs filed on behalf of: various retail business associations, 41 states collectively, the National Governors Association, the National Conference of State Legislatures, the Council of State Governments, the National Association of Counties, the National League of Cities, four U.S. Senators (two Republicans, two Democrats) and the Solicitor General of the United States.

Numerous other organizations filed briefs, including: the Multistate Tax Commission, Streamlined Sales Tax Governing Board and Tax Foundation. One was filed on behalf of “professors of tax law and economics at universities across the United States”. All these can be viewed here. Some taxpayer advocates argued against giving states the authority to require collection. But a majority favor overturning Quill. Typical is the argument of the Solicitor General, stating in its brief:

“In light of internet retailers’ pervasive and continuous virtual presence in the states where their web sites are accessible, the states have ample authority to require those retailers to collect state sales taxes owed by their customers. Quill Corp. v. North Dakota, 504 U.S. 298 (1992), should not be read to bar that result, both because the Quill Court did not and could not anticipate the development of modern e-commerce and because Quill’s analysis was deeply flawed.”

The Tax Foundation, whose brief does not directly support either party, made some important points. It recognizes that the U.S. Constitution’s Commerce Clause prohibits states from unduly burdening or unfairly taxing interstate commerce. But it also recognizes that the current hodge-podge of state laws is untenable. The Tax Foundation maintains that the South Dakota law is constitutional because it minimizes the burden on commerce by adhering to uniform and standard administration. Its brief sums it up saying:

“The Court’s guidance is needed before the states subject interstate commerce to death by a thousand cuts. (And it asks that) the Court reverse the decision of the Court below and uphold the South Dakota statute, but also resolve an almost universal lack of clarity about the proper scope of state sales taxation of out-of-state entities.”

The outcome of this case, 50 years in the making, will have a significant impact on many people. States and local governments care about this case because there is around $20 billion of state tax revenues at stake. (Estimates range from $13 billion to $26 billion and the number will only get larger as time goes by.) Indiana’s share would probably be in the $200 million range, so the state’s budget makers care.

Brick-and mortar retail businesses in Indiana care because they must compete with online retailers and having to charge their customers the 7% Indiana sales tax puts them at a price disadvantage to the online sellers who don’t collect it. Indiana businesses that sell online to customers in other states care because they must comply with the expanding spectrum of varying state laws. Taxpayers should care because they are legally already obligated to pay use tax on their online purchase, whether they presently do or not, and because dwindling/unrealized revenues can spur tax increases elsewhere.

SCOTUS hearings are not broadcast. However, a recording of the oral argument will be made available the Friday following the hearing.

The Court’s decision will be made sometime before the end of June when its current term expires.

Throwback Thursday: 1946 Indiana Chamber News

in news pic

Before there was our award-winning BizVoice magazine, we published the Indiana Chamber of Commerce News. We recently found the October 1946 issue in our archives. The edition features an article promoting the Chamber’s Annual Meeting, noting its speaker, Charles E. Wilson, president and CEO of General Motors Corporation in Detroit. It lists the previous four years’ speakers as:

  • 1945 – Supreme Court of the U.S. Chief Justice Fred M. Vinson (then Secretary of the Treasury)
  • 1944 – Henry J. Kaiser, famous industrialist
  • 1943 – Eric A. Johnston, president, Motion Picture Association of America (then president of the U.S. Chamber of Commerce)
  • 1942 – B.C. Forbes, editor of Forbes Weekly

Note the circulation of the publication as reaching 8,500, so it’s encouraging to see we had a broad reach back then, just as we do today.

Online Sales Tax Collection Inching Closer?

19145168It’s been nearly 25 years since the U.S. Supreme Court ruled in the Quill case regarding online sales – that states could not require a company that has no physical presence in their state to collect the state’s sales tax when they sell their goods to a resident of that state through the mail or via the Internet.

The Court held that requiring the collection of sales tax, without congressional authorization, constitutes interference with interstate commerce in violation of the U.S. Constitution. So Congress needs to pass legislation allowing the states to require online sellers to collect the tax. But that has still not happened.

The Marketplace Fairness Act (MFA) legislation would provide the needed authority, but hasn’t gotten enough support.

The opposition primarily comes from two groups: (1) some of the Internet-based companies which would have to collect the tax; and (2) people who view the legislation as a new tax.

Internet companies object to the administrative burden of collecting and remitting the tax, and they obviously want to maintain their current price advantage over the local brick-and-mortar retailers and other Internet companies that have a physical presence in many states, who must already collect and remit sales tax.

Those who consider it a new tax are, at least technically-speaking, simply wrong. When an in-state resident buys something online and doesn’t pay because the company isn’t obligated to collect the tax, those residents are legally responsible to pay the equivalent of the sales tax.

In these cases it is called a “use” tax (because they use the purchased product in their state) and everybody is supposed to report it on their state tax return. Unfortunately, the vast majority of taxpayers ignore this obligation. The simplest answer is to have the Internet seller collect the tax just as the local retail store does.

Online purchases now make up close to 10% of all retail sales and that percentage is steadily climbing.

This is a growing problem across the country, but especially for states like Indiana that are heavily dependent on sales tax – which accounts for 46% of Indiana’s total tax revenues. States are losing an estimated $11 billion in uncollected sales tax each year. Indiana’s losses are put at $200 million annually, and these numbers are growing by nearly 10% each year.

No question these numbers are driving up pressure for Congress to take action. The MFA passed the Senate in 2013, but it got bogged down in the House Judiciary Committee.

Many who are dedicated to the cause have worked to iron out a number of administrative wrinkles and to keep momentum going on this effort. The best speculation is that it will have to be made part of some larger legislative package in order to garner some compromises and the necessary level of support.

Of course, it is impossible to predict, but tax reforms and such tax packages could be on the table after this election year.

Temporary Halt to EPA Clean Power Rule

10044552Last summer, President Obama attempted to circumvent Congress by implementing increased regulation of carbon emissions from power plants through the Environmental Protection Agency (EPA). This was after his climate change legislation failed twice in Congress. However, it is the responsibility of Congress – not the administration – to set policy. The successful Supreme Court appeal centered on that point.

These proceedings are especially important for Indiana, which is the number one per capita manufacturing state in the nation. Over 80% of Indiana’s electric power comes from coal, compared to only 45% for the country. Despite diversification efforts, coal remains Indiana’s primary energy source.

Skipp Kropp, attorney at Steptoe & Johnson PLLC and a member of the Indiana Chamber’s Energy Committee, summarizes the legal battle and what it means. Further analysis available from the Competitive Enterprise Institute.

Texas/Oklahoma Saga Latest in U.S. Water Battles

We've discussed battles over water rights previously — and certainly will again. Last week, the U.S. Supreme Court basically told Texas it has no right to claim billions of gallons of water on the Oklahoma side of the Red River. The Court reinforced an existing compact between those two states, Arkansas and Louisiana. Stateline reports:

The U.S. Supreme Court Thursday unanimously rejected a Texas water district’s attempt to tap river water in Oklahoma, settling a dispute that raised questions about state sovereignty and natural resources at a time when water is increasingly scarce and fought over.

The ruling found that the Texas authority had no right to the water in question, despite a four-state pact designed to ensure equal access to the water that flows in the Red River. The Tarrant Regional Water District had filed a lawsuit in 2007 saying Texas was entitled to some 130 billion gallons of water on Oklahoma’s side of the river basin.

As Stateline previously reported, the questions at the heart of the case have taken on increasing importance as drought and water shortages have strained water supplies and relations among many western states.

The dispute was seen as a potential test case for states’ rights over natural resources, but it’s likely the effect will be narrow, Marguerite Chapman, a law professor at the University of Tulsa, said.

“I think it affirms the integrity of an interstate compact as essentially a contract,” she said. “I don’t think it will disturb other compacts…the far-reaching effect would essentially be affirming the language that’s in the contract.”

The case centered on the Red River Compact that was signed by Texas, Oklahoma, Arkansas and Louisiana and approved by Congress in 1980.

The compact grants the states “equal rights to the use and runoff” of undesignated, or unallocated, water that flows in the sub-basin where the Tarrant district is staking its claim — but only if flows to Louisiana and Arkansas reach a certain threshold.

“No state is entitled to more than 25 percent of the water,” the pact says.

The compact has been in place for decades, but Oklahoma lawmakers enacted a moratorium on cross-state transfers in 2002. When the original moratorium expired in 2009, the Oklahoma legislature overhauled the state’s permitting process to effectively exclude out-of-state applicants for water.

A Statement on Today’s Health Care Decision by the Supreme Court

Indiana Chamber of Commerce President and CEO Kevin Brinegar reacts to the U.S. Supreme Court’s ruling on the Affordable Care Act, announced today:

Conventional wisdom and national polls showed many Americans favored repeal of the measure, so we are surprised by the Court’s decision.

"Our concern is the impact the health care law — now that it’s going forward — will have on Hoosier businesses and their workers. Mandating coverage for pre-existing conditions and extending coverage for dependent children to age 26 will cause increases in health care costs; there is no way around it.

"That will force many employers to make the difficult decision to stop offering coverage and push employees into the federal plan. It puts the nation on the road to universal health care.

Pres. Obama’s Health Care Plan in Limbo

Businesses everywhere are anxiously awaiting how the Supreme Court will rule on President Obama’s federal health care reform plan this week. The decision will have many ramifications for businesses — and could even force some to reverse adjustments they’ve been making since 2010. CNBC reports:

First, an important caveat: Most of the employer provisions of the health care reform law apply only to businesses with 50 or more employees. So, if your business is smaller than that, you’re mostly off the hook — and you won’t be required to provide health insurance to your employees regardless of what the court decides.

But if your company is larger — or if you’re already growing and expect to someday employ more than 50 people — there’s a lot of unsettled business. Bigger firms that fail to offer their employees insurance could wind up paying government fees, which would kick in when employees obtain insurance independently. At the same time, the law would create exchanges and subsidies for individuals who buy insurance on the open market, and would also expand the Medicaid program.

Of course, there are many other provisions and exceptions. For example, even though companies with more than 50 employees would be required to provide insurance, they would also be allowed to skip paying the $2,000-per-employee government fee for the first 30 employees who didn’t have health insurance. (If you’re having trouble with that exception, rest assured that we had to think it through a dozen times before it made sense, too.) The truth is that once you get deep in the regulations  —many of which haven’t even been written yet —nobody really knows how things will settle out.

The Individual Mandate

Most of the legal attention has been focused on the so-called "individual mandate," which requires people to purchase health insurance, either through their employers or on the market. It was this provision that garnered the most pointed questions from the justices at oral argument in March.

"Can you create commerce in order to regulate it?" Associate Justice Anthony Kennedy asked at the time, apparently trying to figure out how the United States could justify requiring people to buy health insurance under the Commerce Clause of the U.S. Constitution. He later added that he believed the government faced "a heavy burden of justification," and was "changing the relationship of the individual to the government."

Under the mandate, individuals who fail to acquire insurance would be subject to government fees — although the exact nature of those fees, and whether they would amount to taxes, penalties or something else — is one of the more esoteric but important issues in the case before the court.

Despite the 2,400-page law’s complexity, the possible outcomes really fall into three categories. The court could strike down the law, uphold the law, or strike down some provisions. If that happens, it’s most likely that the court would get rid of the individual mandate will while upholding the rest of the law.

Also, Barbara Lewis of Inside INdiana Business spoke with Ice Miller’s Greg Pemberton about the possibilities and what they mean for the business community.

And the Legislators’ Grades Are …

We asked you to evaluate the efforts of the Indiana General Assembly in 2012 and you responded with how I imagine most teacher gradebooks end up looking — a wide variety of marks.

The totals:

  • 28% give legislators a B, with the same percentage not so happy as they offered a D grade
  • 21% say A
  • 17% go down the middle with a C
  • About 7% are in the "other" category (likely an "F" grade)

Right-to-work, a smoking ban that covers 95% of workplaces and elimination of the state’s inheritance tax rank high on the Indiana Chamber’s list of priorities. Despite a few missteps, I’ll go with an "A" for the year.

Our new poll question (top right) offers you the chance to play Supreme Court justice on the health care reform law. Thanks for reading and voting.

Judge: Supreme Court Voice Needed on Health Care Reform

The Florida judge who declared the federal health care reform law unconstitutional "updated" his own ruling yesterday and urged that "the sooner this issue is decided by the Supreme Court, the better off the entire nation will be."

On January 31, 2011, U.S. District Judge Roger Vinson (Pensacola, Florida) determined that the “individual mandate” provision of the Patient Protection and Affordable Care Act (PPACA) is unconstitutional and declared the remainder of the Act void because it was not severable.  The defendants (the Obama administration) filed a motion to clarify with the court, suggesting that there would be adverse consequences from an immediate halt of implementing the Act given that many provisions are now in effect and that several other district court judges have upheld the law.

Yesterday, the judge stated that while his original order “was as clear and unambiguous as it could be, it is possible that the defendants may have perhaps been confused or misunderstood its import.”  He did however, treat the clarification as a stay from his original order and as such granted it.  He conditioned the stay upon the defendants filing their anticipated appeal within seven days of his order, either in the Court of Appeals or with the Supreme Court. He chastised the administration that it had been more than a month since his order and the defendants had not filed their notice of appeal.

Twenty six states, including Indiana, are party to the lawsuit. On Wednesday at the Indiana Statehouse, a joint meeting took place with the House and Senate Insurance and Health Committees. Attorney General Greg Zoeller commented on PPACA and offered his view that in those states that were party to the suit the Act was unenforceable. Those comments do not apply a day later as Judge Vinson’s stay to his original order was granted.