After years of treading water, advocates for tougher rules on taxing online retail sales may make some major headway in 2018.
Over the last 15 years, the boom in online shopping has hit state coffers hard, costing billions of dollars as internet retailers didn’t charge customers sales tax. Only recently have some sellers like Amazon begun to voluntarily add sales tax, while several states are searching to find legal workarounds to capture some of that lost revenue.
Those state efforts, along with a new Supreme Court case set to be heard later this year, could mean that the online-sales-tax issue may see significant movement in 2018. And after years of Capitol Hill being unable to work out a fix, a decision may spur Congress to avoid a state-by-state mishmash of tax-collection requirements by passing nationwide rules.
Likely in April, the Supreme Court will consider a major case on the issue of whether states can require out-of-state retailers to collect sales taxes. South Dakota v. Wayfair, Inc. could overturn a previous case, Quill Corp v. North Dakota, and allow states to demand that online sellers collect sales taxes, even if companies don’t have a physical presence in the customer’s state.
“It’s certainly not a guarantee that they’ll decide the Wayfair case in a manner that would result in a repudiation of Quill, but so far all indications are in the direction that they’re going to repudiate the 1992 Quill holding,” said Kirk Stark, a professor of tax law and policy at UCLA.
Not all experts agree that the Court may overturn Quill, but if it does, the decision could have a billions-of-dollars impact on state tax revenues across the country, spurring states to enact legislation directly requiring online companies to collect sales taxes.
The Quill case helped establish that a state couldn’t collect remote sales tax from companies with no physical presence in the state, because the record-keeping would create an undue burden on the companies.
But that decision was in the days of a relatively small mail-order market. E-commerce retail sales topped $340 billion in 2015, according the most recent data provided by the U.S. Census Bureau. Today, the argument in favor of overturning Quill is that technology has not only caused explosive growth in online, cross-border sales, but also made it easier to calculate the buyer’s sales tax at the moment of sale, thus limiting the undue burden on companies.
In lieu of a Supreme Court decision or a legislative fix at the federal level, states have devised workarounds to the Quill decision. In total, 34 states introduced 81 pieces of legislation in 2017 affecting online-sales-tax rules, according to MultiState Associates, a government-affairs firm.
Beginning Jan. 31, Louisiana will begin requiring that retailers send notices to taxpayers reporting what sales taxes they owe to the state. It’s a way to calculate the sales-tax burden for state residents without requiring out-of-state retailers to actually collect the tax, which Quill prohibits.
Similar laws have been adopted by other states including Pennsylvania, Rhode Island, and Vermont. Those are styled after a 2010 Colorado law that was challenged in federal court and upheld. And it’s in that Colorado case that proponents of ending Quill may have found a few allies on the Supreme Court.
There are at least two justices whose rulings have hinted at opinions on a case overturning Quill. In a 2014 ruling on a Colorado online-sales-tax law, Justice Anthony Kennedy said in a concurring opinion that while the Colorado case wasn’t the right vehicle, the legal system should find an “appropriate case” for the court to reexamine Quill and an earlier, similar court decision. Kennedy’s statement spurred states like South Dakota to bring up test cases in an attempt to overturn Quill.
Before the Colorado case made it to the Supreme Court, it passed through the U.S. Court of Appeals for the 10th Circuit, where then-Judge Neil Gorsuch—now a Supreme Court justice—wrote that the Quill decision may have “attached a sort of expiration date” to out-of-state vendors’ reliance on past court decisions by encouraging states to find other ways of collecting sales taxes, such as through expanded reporting requirements.
If the Supreme Court finds in favor of South Dakota, it could cause a scramble as states set up their own online-sales-tax regimes. Businesses, including small-scale shops exempted by past legislative proposals, would be immediately required to collect sales taxes for online purchases with little infrastructure in place.
“If the Supreme Court rules in South Dakota’s favor, it could become a marketplace free-for-all,” Rep. Kristi Noem of South Dakota said in a statement calling for Congress to sort out the issue.
Fearing the confusion and administrative burden from a state-by-state system of calculating and reporting requirements, a court decision in favor of South Dakota may spur Congress to finally advance a set of nationwide guidelines.
“Quill has been a reason for Congress not to act, and it may well be that if Wayfair repudiates Quill, then that will, I think, create more pressure for Congress to act,” Stark said.
In this Congress, as in many before, lawmakers have introduced legislation that would grant states the authority to require companies to collect online sales tax. Lawmakers introduced the first version of the Marketplace Fairness Act in 2011, and in 2013 the Senate passed the bill on a bipartisan vote, only for it to languish in the House.
Noem introduced a similar bill, the Remote Transactions Parity Act, in the House in April 2017. Her legislation would include a phase-in period for the collection requirements.
Opponents of the Marketplace Fairness Act and similar bills say it would create massive new compliance costs for businesses, which would hurt small businesses the most.
Key House committee gatekeepers have had other ideas as well, and the Marketplace Fairness legislation has had trouble getting off the ground. House Judiciary Committee Chairman Bob Goodlatte—who is set to retire at the end of this term—heads the panel that would take up an online-sales-tax bill, and he has been skeptical of the solutions proposed in bills like the Marketplace Fairness Act.
Goodlatte is a cosponsor of a bill introduced in June that would effectively codify the Quill decision, prohibiting states from taxing activity in interstate commerce unless a company has a physical presence in the state. He’s also proposed imposing the sales tax in the seller’s jurisdiction, rather than the buyer’s.
Still, Congress may also face pressure to preempt a Supreme Court decision by finally passing legislation resolving the issue, said Harley Duncan, managing director and leader of the state and local tax group at the Washington National Tax practice at KPMG.
“There will be a lot of short-term interest between now and June by some in trying to conclude a federal bill,” Duncan said.
If the Supreme Court doesn’t overturn Quill, Duncan said, there likely won’t be a significant shift in Congress toward passing a bill. But states could continue to craft legislation trying to capture some of their lost revenue, redefining the legal definition of “physical presence,” examining the role of third-party operators as a vector to collect the revenue, and enacting more reporting requirements.
In that case, he said, “I think we are right back to where we’ve been over the last several years.”