The issue of whether online retailers should be legally required to collect state sales tax is likely to get the U.S. Supreme Court treatment soon.
The South Dakota Supreme Court on Thursday teed up the issue when it ruled that the state could not require web sites like Overstock.com and Wayfair.com to collect a 4.5 percent state sales tax on purchases, considering the companies do not have a physical retail stores or warehouses there.
Writing for a three-judge panel, Judge Glen Severson cited the federal supreme court’s 1992 ruling in Quill Corp. v. North Dakota, which found that a “physical presence” for a direct mail or online company was required in a given state before a company could be forced to remit sales tax. This was years before online retailers like Amazon were doing tens of billion of dollars in sales or anyone imagined overall e-commerce sales would be in the trillions of dollars.
South Dakota attorney general Marty Jackley, who represented the state as a plaintiff in the litigation against the online retailers, said the court’s decision “paves the way to respectfully request the U.S. Supreme Court to provide much-needed fairness to save main streets and jobs across South Dakota.”
Jackley’s office also said the state’s litigation was aimed at getting the issue in front of the federal supreme court, given the “extraordinary growth” of online retail over the last 25 years.
“If the U.S. Supreme Court ultimately strikes down Quill, retail sales tax obligation can be applied fairly to both Internet and main street businesses,” the office wrote in a statement.
South Dakota last year passed a law that would require out-of-state retailers doing more than $100,000 in annual sales or counting more than 200 transactions to collect sales tax, something that the state sees as a serious revenue booster. But that law was challenged by some online retailers as going against federal law set down by Quill.
Should the Supreme Court take up the case and find that online retailers need to comply with state tax laws, it could mean many billions of dollars in additional revenue for state governments. The National Conference of State Legislatures said last year the Quill “loophole” cost states more than $17 billion.
For its part, Amazon, the most well-known online retailer, in 2011 preemptively began remitting state sales tax in a handful of states in by spring of this year, it was collecting state tax in every state with such laws. This is contrary to presidential tweets implying otherwise.
And the prospect of the Supreme Court changing its mind on Quill is by no means out of the question.
Justice Anthony Kennedy went out of his way in a 2015 to express his displeasure with the disparate treatment of internet companies and brick-and-mortar retailers when it comes to state sales tax. And he did so despite being one of the justices to support the Quill ruling in 1992.
Writing a concurring opinion in a unanimous ruling that upheld Colorado’s imposition of taxes against out-of-state direct marketers, Justice Kennedy said the court’s reasoning in Quill was “tenuous” and that it is “now inflicting extreme harm and unfairness on the States.”
“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,” Justice Kennedy went on. “This argument has grown stronger, and the cause more urgent, with time.”
The next session of the Supreme Court is expected to begin Oct. 2.
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