On Friday (1.12.2018), the U.S. Supreme Court announced it will take up a case that could require online retailers to collect state sales tax on purchases made online. In a previous 1992 case (Quill v. North Dakota), the court ruled that a direct marketing company cannot be forced to collect sales tax in states where it has no physical presence. While the Quill decision was made prior to the explosion in online e-commerce, the court has used it as the reason to avoid taking up a case specific to internet “e-commerce.”
By deciding to consider the current case (South Dakota v. Wayfair), the court is heeding calls from traditional retailers and dozens of states that contend that the 1992 ruling is obsolete in the e-commerce era. As part of the 1992 decision, the court indicated that Congress should take up the matter. The full Congress has not addressed it, however.
Main Street merchants vs. online e-commerce
Traditional Main Street small and local retailers have long argued that it’s unfair to not require online retailers to collect state sales tax. However, many major online retailers like Wayfair Inc., Overstock.com Inc. and Newegg Inc. are opposing South Dakota in the court fight. Each collects sales taxes from customers in only some states. (Amazon.com is not involved in this case, as explained below.)
“If Quill is overruled, the burdens will fall primarily on small and medium-sized companies whose access to a national market will be stifled,” the companies have argued in court documents. “Sales tax laws across the country are too complicated for retailers to know how much tax to collect unless they were physically present in the customer’s state.”
While this may have been true in the past, the National Retail Federation (NRF), a supporter of overturning Quill, now says that computer software has made that concern obsolete. The NRF says that Congress “…should not sit on the sidelines as the Supreme Court considers this case. It’s time to pass legislation to settle this critical issue once and for all. Even if the court rules in favor of a modern sales tax policy, legislation will still be needed to spell out how that would work.”
Why state and local governments support overturning Quill
State lawmakers may be ready to take up the legislation because 45 states with income taxes are seeking ways to make up the revenue they have lost due to provisions in the recently-passed tax reform act.
According to a report by the non-partisan congressional Government Accountability Office, state and local governments could have collected up to $13 billion more in 2017 if they’d been allowed to require sales tax payments from online merchants and other remote sellers. Other estimates are even higher. All but five states impose sales taxes, according to Bloomberg.
What about Amazon.com?
While Amazon.com is by far the largest online retailer in the U.S., it isn’t directly involved in the current court review.
In the past, Amazon used Quill to avoid collecting sales tax at all. The company has gradually changed its position as it has built warehouses — and thus, created a greater physical presence — all over the country. The company now says it backs a nationwide approach that would relieve retailers from dealing with a patchwork of state laws.
When selling its own inventory, Amazon charges sales tax in every state that imposes one, but about half of its sales involve goods owned by third-party merchants. For those items, the company says it’s up to the sellers to collect any taxes, and many don’t.