The Supreme Court decided in favor of a South Dakota law imposing taxes on online sales, but the ruling’s language leaves room for action by state and federal lawmakers—and perhaps more court cases.
The 5-4 ruling will likely have a sweeping impact on online commerce and could mean billions of dollars in additional revenue for states. And buried on page 23 of Justice Anthony Kennedy’s majority opinion could be the key to how other states will shape their own online-sales-tax laws now that the Court has weighed in on the issue.
“I think what the Court did in the opinion was spotlight some features of South Dakota’s tax system that probably offers a road map for other states going forward,” said David Parkhurst, general counsel and staff director at the National Governors Association.
Kennedy noted the South Dakota law’s “safe harbor” provision for businesses that do only a few sales within the state. Retailers that do less than $100,000 in sales or fewer than 200 transactions in the state in the previous year are exempt from the sales-tax rules.
The South Dakota law also does not attempt to retroactively collect sales tax on transactions in previous years. And justices noted that the state was a member of the Streamlined Sales and Use Tax Agreement, a multistate pact that seeks to harmonize sales-tax rules across state lines, theoretically making the taxation of cross-border transactions easier.
“It tells states that if your law has these three features your law is almost certainly OK, and if you don’t have these three features you are more in uncharted waters,” said Alan Viard, resident scholar on federal tax and budget policy at the American Enterprise Institute.
In the South Dakota v. Wayfair ruling, the justices essentially gave the green light to other states to enact similar laws collecting online-sales tax, even if the retailer doesn’t have a physical presence in their jurisdiction. The opinion overturned the 1992 Quill v. North Dakota decision and its predecessor, the 1967 National Bellas Hess, Inc. v. Illinois Department of Revenue, which established a rule requiring retailers to have a physical presence in a state before state governments can levy a sales tax.
Nationwide, 31 states have laws taxing online sales, and others are working on such laws. South Dakota’s law served as a test case for the issue in the Supreme Court, and as more states look toward enacting online-sales-tax legislation or updating existing rules, officials will likely need to adhere to Kennedy’s three details or face legal difficulties, Viard said.
“If some state decides to do something where they don’t have the same small-seller protections, or certainly where they try to impose retroactive liability, clearly there’d be court cases on that and you could certainly imagine them coming back to the Supreme Court,” Viard said.
Moreover, not all states are signatories to the Streamlined Sales and Use Tax Agreement. Most states, however, are likely to hew closely to the South Dakota law, Parkhurst said.
That leaves room for Congress to step in, despite lawmakers having failed for years to pass legislation resolving the online-sales-tax issue.
The last time Congress approached a solution to the issue was during a March debate over a federal spending bill, when Rep. Kristi Noem of South Dakota unsuccessfully tried to insert the Remote Transactions Parity Act into the measure. The RTPA would have preempted the Wayfair case by making it legal for states to levy online-sales tax on out-of-state retailers.
Lawmakers have for years tried to advance a similar measure, the Marketplace Fairness Act, as well, but House Judiciary Committee Chairman Bob Goodlatte has opposed those efforts.
Goodlatte, whose panel has jurisdiction over Commerce Clause and interstate-commerce issues, declined to comment to reporters on the ruling, but his office released a statement criticizing the decision.
“The Court’s reversal of Quill’s physical presence principle is a nightmare for American businesses and small online sellers, who will now have to comply with the different tax rates and rules of, and be subject to audits by, over 10,000 taxing jurisdictions across the U.S. in which they have no say at the ballot box or representation in state and local government,” the statement said.
The decision could put pressure on Goodlatte—who has in the past supported language that would levy sales tax in the retailer’s state, not the buyer’s—to move legislation that would create congressional backing for the framework laid out by Justice Kennedy.
“What Congress may do is try to codify some of the protections for out-of-state sellers,” Viard said. “So I think barring retroactive liability would be a very sensible thing for Congress to do, and I think there’s probably a good chance Congress would want to do that and will do that.”
Goodlatte, who has been caught up in battles over immigration legislation all week, has not indicated what his next move on online-sales taxes will be.
“I do not foresee this Congress acting on this before the end of the term,” Parkhurst said. “This is an issue that’s going to get teed up for next Congress, and there’s going to be a whole new class of House and Senate members, so we’ll see what happens.”
Goodlatte is set to retire at the end of this legislative session.
Senate Finance Committee ranking member Ron Wyden, an opponent of the Marketplace Fairness Act and its derivatives, said in a statement that he would push his panel to counteract Thursday’s Supreme Court decision.
“I’ll do everything I can as the top Democrat on the Finance Committee to protect Oregonians—and small business everywhere—from being harmed by this catastrophic decision,” said Wyden, whose home state of Oregon has no sales tax.