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Supreme Court Rules in Favor of Online Sales Tax Collection; Indiana Poised to See Millions in New Revenue

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The U.S. Supreme Court decision issued yesterday in South Dakota v. Wayfair has been awaited by many brick-and-mortar retailers and state budget-makers for over 25 years. In a nutshell, the Supreme Court’s decision (5-4) will permit states to move forward with sales tax collection from online retailers.

The Court overturned the Quill v. North Dakota decision (and Bellas Hess on which Quill was based) dealing with sales tax on mail orders – dating back to 1992, well before the internet boom. The Court found those old decisions to be “unsound and incorrect” and deemed them to be “an extraordinary imposition by the judiciary on states’ authority to collect taxes and perform critical public functions.” The old cases found that requiring the collection of sales tax, when the seller has no physical presence in the state, an undue burden on interstate commerce – a constitutional issue. The “physical presence” test effectively prohibited states from requiring an out-of-state business to collect sales tax from its customers. But now the Court has stated that it “can no longer support the prohibition of a valid exercise of states’ sovereign power”. To put it simply, times have changed. There is readily available software that online retailers can utilize to set up the sales tax collection; it’s no longer a big deal. Separately, the online retail market has become so huge in the last two-plus decades as consumer shopping preferences have shifted; that’s made it all the more imperative that the segment be on a level playing field tax-wise with brick-and-mortar stores.

The Court also addressed the widely-held notion that this issue needed to be resolved by Congress. The Court responded to that saying, “It is inconsistent with this Court’s proper role to ask Congress to address a false constitutional premise of this Court’s own creation.”  In other words, the Court created this dilemma, if you will, with the Quill case and determined it needed to be the one to then provide a remedy.

The new ruling essentially upholds the South Dakota statute that allowed the state to require online sellers to collect sales tax if they deliver over $100,000 in goods into the state, or have over 200 separate transactions with customers in the state. (Technically, the case was remanded to the South Dakota Supreme Court to issue a new determination without the Quill case serving as a controlling precedent.) The Court found that the requirement under other precedent – that the seller have legal nexus in the state – was clearly met by the sales thresholds of the South Dakota Act.

The Indiana Chamber has been a long-time advocate for online sales tax collection; it is one of the key goals in our Indiana Vision 2025 plan. State lawmakers, led by former Sen. Luke Kenley, were also attuned to these issues and quite wisely enacted legislation in 2017 that was modeled after the South Dakota statute. In fact, our law is essentially identical. This means that with a law that the U.S. Supreme Court has now found legally sufficient, Indiana is poised to begin requiring online sellers to collect and remit Indiana sales tax from their Indiana customers. Again, this is directed at those online sellers who meet the $100,000 or 200 transaction thresholds outlined above.

 It is worth mentioning that Hoosiers are already legally obligated to pay the online sales tax when they file their state income tax returns, but as a practical matter almost nobody does. Uncollected sales tax from online transactions has resulted in substantial loss of revenue to states, thus increasing the tax burden on those who do pay the taxes they owe. Estimates place the uncollected tax for the state of Indiana at more than $100 million annually, perhaps as high as $200 million. That number has grown exponentially with the popularity of online shopping and is only going to keep rising.

So here’s to the U.S. Supreme Court for rectifying this long-standing problem, leveling the playing field between businesses and placing the sales tax burden evenly.

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

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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.

Online Sales Tax Collection Inching Closer?

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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.

What to Do About Online Sales and Sales Tax

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What should be done with online retailers and sales tax? The story is the same in most states – they’re not required to pay and most consumers don’t volunteer for the "use tax" in place in many areas. With state fiscal challenges and online sales both growing, don’t expect this issue to go away soon. The Pittsburgh Post-Gazette writes:

If you buy Christmas gifts online this year, you may be saving money on your end, but you might also be costing the state treasury its fair share of sales tax revenue.

State revenue departments across the country have complained for years that big online retailers aren’t remitting their share of sales taxes. At stake are the hundreds of millions of dollars that Pennsylvania and other states are losing when a shopper buys a CD, book or television online, instead of in a bricks-and-mortar store.

In Pennsylvania, the Department of Revenue estimates that the state is missing out on nearly $300 million in sales tax every year.

"Pennsylvania is not the only state in this boat," said Stephanie Weyant, spokeswoman for the revenue department.

Every year since Internet shopping began being measured, the amount spent online has increased annually. On Cyber Monday alone — the Monday after Thanksgiving — about $900 million was spent online this year, either at stores that operate exclusively in the cybersphere, such as Amazon.com, or at the online divisions of actual stores, such as Best Buy.

Online retailers that do not maintain a physical presence in Pennsylvania are not required to remit a sales tax (though some do so voluntarily), thanks to a 1992 court decision that predates the era of Internet shopping. In Quill Corp. v. North Dakota, the Supreme Court ruled that a retailer or purveyor of goods couldn’t be forced to remit sales taxes to another state unless it had some kind of "nexus" there, a physical presence such as a store or warehouse.

For years, Congress has been debating federal legislation requiring all retailers to figure out how to remit the sales tax to the appropriate state, but so far, the law has gained little traction and has been opposed by Amazon.com, considered to be the biggest cyber-fish out there.

While Congress has been inactive on the issue, New York has been proactive, passing a law that requires Amazon.com and other Internet retailers to collect sales taxes on transactions with New York customers. Amazon challenged the law, lost in January, and now a New York appeals court is expected to issue its own ruling soon, according to a report in The New York Times. If the law stands, other state legislatures would be tempted to follow the same legislative path, especially given the depleted condition of many state treasuries.