Since the Supreme Court’s landmark decision in South Dakota v. Wayfair, more than half of the states with sales tax have rapidly taken steps to begin collecting sales tax from out-of-state retailers, with 24 of the 45 states with a sales tax in various stages of requiring out-of-state retailers to collect.
As we previously reported, in Wayfair, the Supreme court ruled that internet retailers can be required to collect sales and use tax in states in which they lack a physical presence, overturning 26 years of precedent barring states from taxing out-of-state sellers.
Some states, like Massachusetts, are already enforcing laws they had on the books, while others will start on October 1, the beginning of the fiscal year for many states, or January 1 . A number of states are still in the process of formulating their respective remote collection laws, while others are delaying enactment to provide notice to retailers.
One issue being addressed is the new requirement that “marketplace providers,” which offer third-party vendors a platform on which to sell goods (e.g. Amazon, Ebay, and Etsy), will also need to begin collecting and remitting tax on those facilitated sales.
While Amazon and others have been collecting and remitting taxes on their own transactions, marketplace provider laws require them to also collect tax on the sales they facilitate for millions of small vendors using their platforms.
Alabama, Arizona, Connecticut, Iowa, Massachusetts, Minnesota, Oklahoma, Pennsylvania, Rhode Island, and Washington have already enacted these laws. Additional states are in the process of either enacting such requirements or imposing them administratively.
For more information, contact the author, Charles Lin, or any member of our Retail or Tax Advice and Controversy teams.
In a highly anticipated decision, the U.S. Supreme Court has ruled in South Dakota v. Wayfair, Inc., that internet retailers can be required to collect sales and use tax in states in which they lack a physical presence, overturning 26 years of precedent barring states from taxing out-of-state sellers.
As we previously reported, South Dakota brought the suit, acknowledging that its position defies the Supreme Court’s holding in the 1992 case Quill Corp v. North Dakota, by arguing that the development of the internet and ensuing growth in online shopping necessitate reconsideration of the requirement that a business have a physical presence within a state in order to be subject to that state’s sales tax collection obligations.
By a 5-4 vote, the court found for South Dakota, holding that the state’s 2016 law mandating that certain out-of-state sellers collect and remit tax regardless of whether they had a physical presence in South Dakota, is permissible under the commerce clause.
The Supreme Court vacated and remanded the opinion of the South Dakota Supreme Court, which previously found the South Dakota law unconstitutional because it was contrary to Quill. Justice Anthony Kennedy wrote the opinion for the majority. In his concurrence in a prior case, he had stated that the court should consider an appropriate challenge to Quill.
In overruling Quill, Judge Kennedy noted that “[a]lthough we approach the reconsideration of our decisions with the utmost caution, stare decisis is not an inexorable command.” He wrote that Quill’s physical presence rule is “flawed on its own terms” and poses a “serious inequity” by requiring retailers with a physical presence to collect sales tax, while their online counterparts do not. He noted, for example, that “[s]tates are already confronting the complexities of defining physical presence.”
Judge Kennedy concluded that “the real world implementation of Commerce Clause doctrines now makes it manifest that the physical presence rule as defined by Quill must give way to the ‘far-reaching systemic and structural changes in the economy’ and ‘many other societal dimensions’ caused by the Cyber Age.”
Joining him were Justices Ruth Bader Ginsburg, Clarence Thomas, Samuel Alito, and Neil Gorsuch. Justices Thomas and Gorsuch, longtime foes of the dormant commerce clause, filed concurring opinions.
In a dissent, Chief Justice John Roberts said the remote taxation issue should have been left to Congress. He was joined by Justices Elena Kagan, Sonia Sotomayor and Stephen Breyer. Chief Justice Roberts also expressed strong concern about the court turning its back on stare decisis.
“I would let Congress decide whether to depart from the physical presence rule that has governed this area for half a century,” Justice Roberts wrote.
The overturning of Quill, giving states the freedom to reach beyond their borders to compel retailers to collect and remit tax, is the most groundbreaking event in state taxation in decades. A report from the Government Accountability Office in December 2017 found that states are losing up to $13 billion because they could not compel remote sellers, especially internet sellers, to collect and remit tax.
Several states have legislation mirroring South Dakota’s ready to go, and many others are expected to follow.
For questions or more information, contact the author, Charles Lin, at 949-223-7145, or Charles.Lin@bclplaw.com
The U.S. Supreme Court heard long-awaited arguments yesterday in South Dakota v. Wayfair, the case brought by the state against several retailers, hoping that the court will overturn over 25 years of precedent on the issue of the collection of sales tax from businesses located outside of the state.
A transcript of the oral arguments is available here, and an audio recording will be available on the Supreme Court’s website this Friday.
South Dakota brought the suit, acknowledging that its position defies the Supreme Court’s holding in the 1992 case Quill Corp v. North Dakota, by arguing that the development of the internet and ensuing growth in online shopping necessitate reconsideration of the requirement that a business have a physical presence within a state in order to be subject to that state’s sales tax collection obligations.
Many await the high court’s decision, from numerous retailers, large and small, wary of the potential burdens of being forced to track and collect sales tax from customers who reside in various jurisdictions with different tax rates, to the states, who could see a boon to their coffers if Quill is overturned.
However, by the end of the arguments on Tuesday, the apparently divided Court left no clear indication that Quill would be overturned.
Justice Sonia Sotomayor suggested that Congress, rather than the Supreme Court, was the right forum in which to settle the matter. “Is there anything we can do to give Congress a signal that it should act more affirmatively in this area?” she asked.
But Chief Justice John G. Roberts Jr. said that “it would be very strange for us to tell Congress it ought to do something in any particular area.”
Justice Roberts also stated that “[t]he bigger e-commerce companies find themselves with a physical presence in all 50 states, so they’re already covered.”
Justice Neil M. Gorsuch seemed prepared to reconsider the Quill decision. “Why should this court favor a particular business model?” he asked.
Some justices said they lacked sufficient information on how hard it would be for small online retailers to collect taxes, and how much money is at stake. Justice Stephen G. Breyer said the two sides were of little help. Estimates of how much it would cost internet businesses to comply with the tax laws of an estimated 12,000 state and local jurisdictions varied from $12 to $250,000.
For questions or additional information, contact the author, Charles Lin, at Charles.Lin@bclplaw.com or 949-223-7145, or any member of our Retail team.
Retailers will be closely watching the outcome of the U.S. Supreme Court’s decision to revisit a 26-year-old case which has limited states’ taxing authority over online sales.
The Supreme Court, heeding calls from traditional retailers and dozens of states, has granted review of South Dakota v. Wayfair, Inc., in which retailers challenge the 1992 ruling in Quill Corp v. North Dakota as obsolete. Quill held – in a pre-internet era – that states cannot impose sales and use tax collection obligations on retailers without a physical presence within a state. As a result, online retailers without a physical presence in a state have developed a pricing advantage over retailers located within the state.
In the meantime, Congress is considering a number of legislative proposals addressing state taxation of online sales, including the Remote Transactions Parity Act, which would allow states to require out-of-state sellers to collect sales tax. The bill has the support of the National Retail Federation.
Additionally, with many major online retailers already collecting and remitting sales and use taxes to states, some states are turning their legislative sights on smaller third-party sellers that move their merchandise over marketplace platforms hosted by e-commerce giants. Last year, Minnesota, Washington, Pennsylvania, and Rhode Island all enacted “marketplace provider laws”—first-ever statutes imposing tax collection duties on marketplaces for sales by their third-party sellers.
Estimates of uncollected state taxes on such transactions vary, but many analysts put the number at several billion dollars annually from Amazon alone. An analyst with Internet Retailer, an e-commerce news and analytics publication, recently estimated the state tax gap could be as high as $3 billion per year from Amazon sellers, and $4 billion when sellers on smaller platforms are added.
South Dakota and several online retailers are currently engaged in a battle over the state’s new internet sales tax law (SB 106) aimed at online businesses who sell products to South Dakota residents but which are not obligated to pay sales tax to the state.
Decades ago, during the internet’s infancy, the U.S. Supreme Court concluded in Quill v. N. Dakota that states are prohibited from requiring companies without a physical presence in those states to collect sales tax from its residents. Among the four internet retailers sued by South Dakota are the popular Overstock.com and Newegg.com.
The state acknowledges in its complaint that SB 106 is a violation of Supreme Court precedent. However, it has stated that the purpose of the suit is to facilitate Supreme Court review, because Quill is outdated in the internet age.
Several outcomes to the case are possible, including a grant of summary judgment for either of the parties with a determination of the applicability of Quill and the constitutionality of SB 106. If South Dakota’s law is struck down as unconstitutional, other states may face legal challenges to their digital sales tax laws. If it is upheld, more states are likely to pass such laws.
South Dakota’s suit is just one of several recent actions taken by states to “modernize” sales tax laws for application to online retailers. Alabama has enacted its own law, which requires out-of-state retailers without a physical presence in the state to collect sales tax when it sells more than $250,000 worth of products to Alabama residents within a calendar year.
The Tennessee Department of Revenue has also submitted proposed regulations that would force sales tax collections on out-of-state retailers who sell more than $500,000 worth of products to state residents.
Meanwhile, Colorado has its own battle over their notice and reporting requirement imposed on out-of-state retailers who do not collect state sales tax.
Based on legal precedent, the South Dakota law is likely to be found unconstitutional. However, in an earlier phase of the current Colorado case which reached the Supreme Court last year, Justice Kennedy issued a concurrence which mentioned the “serious, continuing injustice” that Quill has had on the states, described the case’s authority as “doubtful”, and suggested that the court would re-examine the issue when raised in a more appropriate case.