Image: Franz Jantzen, Collection of the Supreme Court of the United States - Collection of the Supreme Court of the United States

U.S. Supreme Court Sets Date to Hear Sales Tax Case

Late on Friday, the U.S. Supreme Court set a date to hear oral arguments in South Dakota v. Wayfair, Inc. for Tuesday, April 17, 2018.

The case is effectively a revisit of “Quill,” – Quill Corp. v. North Dakota, 504 U.S. 298 (1992) – which made it virtually impossible for states to require sellers to collect sales tax in states other than their own or states in which they have a physical presence such as offices and warehouses.

Due to the significant growth in eCommerce on eBay, Amazon, and millions of large and small eCommerce stores, states have seen tremendous losses in sales tax collection from items purchased by buyers across state lines.

While most states have laws that require buyers to report such purchases and remit Use Tax to the state in which they reside, realistically this scheme was impossible to enforce and the vast majority of buyers never complied.

Several states, most notably Colorado, enacted new laws that attempted to obtain sales records from out-of-state sellers to use as a means to collect Use Tax.

In Direct Marketing Association v. Brohl and Direct Marketing Association v. Brohl II, two connected cases that argued the Colorado reporting requirement on different grounds, the U.S. Supreme court ended up remanding the issue back to the appeal court.

The Direct Marketing Association (DMA) ended up settling with the state of Colorado by dropping the state and federal cases in exchange of Colorado ignoring the penalty fees during the intervening years for non-compliance of the reporting requirements.

Brohl Opens Door

However, the Brohl case opened the door for a revisit of Quill. Part of the Brohl case involved the issue if the U.S. Supreme Court had jurisdiction on state laws as the U.S. Federal Tax Injunction Act (28 U.S.C. section 1341) typically allows state courts to arbiter such cases.

Although the U.S. Supreme Court unanimously sent the case back to the state level, Justice Anthony M. Kennedy provided some significant hope to states. In his concurring opinion about Brohl, he wrote:

“There is a powerful case to be made that a retailer doing extensive business within a State has a sufficiently substantial nexus to justify imposing some minor tax-collection duty, even if that business is done through mail or the Internet.”

“The result has been a startling revenue shortfall in many States, with concomitant unfairness to local retailers and their customers who do pay taxes at the register.”

“The Internet has caused far-reaching systemic and structural changes in the economy, and, indeed, in many other societal dimensions. Although online businesses may not have a physical presence in some States, the Web has, in many ways, brought the average American closer to most major retailers. A connection to a shopper s favorite store is a click away regardless of how close or far the nearest storefront.”

“Today buyers have almost instant access to most retailers via cell phones, tablets, and laptops. As a result, a business may be present in a State in a meaningful way without that presence being physical in the traditional sense of the term.”

“Given these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court s holding in Quill. A case questionable even when decided, Quill now harms States to a degree far greater than could have been anticipated earlier.”

And the final and most important part of his opinion:

“The instant case does not raise this issue in a manner appropriate for the Court to address it. It does provide, however, the means to note the importance of reconsidering doubtful authority. The legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess.”

Justice Kennedy is a conservative-leaning judge. Therefore his opinion raised the eyebrows of some who believed that Quill was essentially safe.

It is generally believed that the four liberal judges on the court are likely more inclined to interpret the U.S. Constitution in a way to favor states to collect sales tax from out-of-state merchants.

In contrast, conservative judges, which count for five on the court, tend to lean toward more narrow interpretations of federal involvement in state matters.

The opinion by Justice Kennedy opened the floodgates for states to enact new laws in trying to collect sales taxes from out-of-state merchants.

Emboldened by the possibility that such laws will withstand a challenge at the U.S. Supreme Court level, states offered up amnesty programs and specifically interpreted Amazon FBA’s program to provide the argument that third party merchants had nexus in their state when products where stored in a local warehouse.

And Here We Are

At heart in this sales tax issue is the if a state’s enforcement activity violates the dormant Commerce Clause, which prohibits states from passing and enforcing laws that unduly restrict the flow of goods and services across state lines.

Even in the Brohl case, Justice Clarence Thomas, another conservative justice on the court, writing for the unanimous court specifically stuck to the issue of the TIA and the interpretation by the appeals court of the TIA in the Brohl case.

He was careful not to offer an opinion on the underlying issue of the case, interstate sales tax collection. Or offer up any hint on how the court may rule on similar cases in the future.

Other justices have made comments in the past that seem to indicate a willingness to take another look at Quill. Most notable is the issue in Quill that it is an undue burden for merchants to collect and remit sales tax to a multitude of sales tax jurisdictions.

However, technology has mostly made this argument moot. And it may be this specific issue that could decide the fate of interstate sales tax collection in the U.S.

South Dakota v. Wayfair, Inc. Direct Challenge to Quill

There is no doubt that the new case of South Dakota v. Wayfair, Inc. is a direct challenge to the Quill decision. One way or another, it will impact eCommerce.

Even the NRF (National Retail Federation) that favors a fair method for online and offline tax collection believes that Congressional action is required even if South Dakota is victorious.

With 45 states and the District of Columbia collecting statewide sales taxes and 38 states having local sales tax options, there are upwards of 10,000 different sales tax jurisdictions.

While states generally collect for all the local sales tax options and thereby the state laws will define much of when collection is necessary, there is the possibility that local governments may want a piece of the pie.

For example, if a state’s sales tax rate is 6 percent, but a buyer’s address is located in a local county that has an optional sales tax rates of 1 percent, the merchant may have to collect 7 percent sales tax.

When adding city or other tax district sales tax options, this could require merchants to collect sales tax on a street address by street address basis.

Then add the complexity of different thresholds by states on when out-of-state sales tax collections may apply or what merchant registration requirements may be necessary.

And states already have differences in product categories that are taxed. Some states do tax groceries, other have a reduced tax rate, and while another group collects the full sales tax. Not to mention limited time sales tax holidays for back to school days or disaster preparedness.

In a completely different tax matter, this year Massachusetts and Vermont changed the threshold for payment processors to report a merchant’s receipt of payments from the federally de facto standard of $20,000 or 200 transactions to $600.

Just that difference created a headache for small sellers. It is very easy to understand why the NRF believes congressional intervention will be needed regardless of the outcome in South Dakota v. Wayfair, Inc.

What do you think about the issue of states attempting to collect sales tax from out-of-state merchants? Head over to our Facebook Discussion Group or use the comments section below to voice your thoughts.

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