By Janna Williams
On April 17th, 2018, the U.S. Supreme Court will hear arguments in South Dakota v. Wayfair, in which the state is challenging the Court’s own 1992 Quill Corp. v. North Dakota ruling. The ruling effectively banned states from requiring catalog merchants like the plaintiff, Quill Corporation, from collecting sales tax unless they had a physical presence in the state.
At the time of the ruling one of the newest personal computers was the Commodore Amiga 1200, the phrasing “world wide web” had just been born, and consumer e-commerce did not exist.
Fast-forward to 2017, when Americans spent $117 billion on online retail in the fourth quarter alone. Yet the 1992 Quill ruling still stands, enabling e-commerce retailers to avoid collecting sales tax outside of their own states. As a result, storefront businesses that are legally bound to collect state sales tax face a 4-11 percent handicap. Under the law, this unequal treatment harms storefront businesses (both independent and chain), forces higher tax rates, and prevents genuine market competition.
The case originated when Wayfair Inc., Overstock.com, and Newegg argued South Dakota’s 2017 law was unconstitutional under the precedent of Quill and declined to comply. This was entirely expected, as the legislation was deliberately written to be challenged and give the Court a chance to overturn Quill. Oral arguments for South Dakota v. Wayfair, Inc. occur April 17th, 2018 and a ruling will be made by June. Some key points for understanding the case:
- South Dakota has no state income tax and relies heavily on sales and use taxes
- The 1992 Court interpretation of the Commerce Clause of the U.S. Constitution in Quill prohibits South Dakota from collecting sales tax from sellers lacking a physical presence in the state.
- In 2016, South Dakota’s legislature passed a law requiring e-commerce retailers with no physical presence in the state to pay sales tax on the goods they sell in the state.
- According to a report released by the U.S. Government Accountability Office (a nonpartisan office that reports to Congress), state and local governments lost out on $8.5 and $13 billion respectively in 2017 taxes collected from out-of-state sellers.
Arguments of plaintiffs (Wayfair, Overstock.com and NewEgg.com)
- The defendants contend, “Congress remains the proper body to address whether, and in what manner, to alter the Quill rule,” and, “overruling Quill presents the risk of crippling liability for retailers in over 30 states.”
- State sales and use tax systems remain inordinately complex and burdensome” and place an undue burden on small and medium-sized retailers, which don’t have the wherewithal to comply with multi-state tax requirements. Note that every piece of legislation to date requiring online retailers to collect sales tax exempts small businesses (those with less than $1 million in sales outside of their home state).
- The three online retailers contend they have “justifiably continued to rely on Quill” and would face hardship if forced to adapt to new laws.
What a win for Wayfair, Inc., et al. would mean:
A ruling in favor of Wayfair would continue the status quo of states being unable to require sales tax collection of companies that do not have a physical presence within the state unless Congress passes legislation authorizing states to do so.
What a win for South Dakota would mean:
If the Court overturns its previous Quill ruling, states likely would be permitted to establish their own laws regarding which businesses may be required to collect sales tax on behalf of the state and its municipal governments. States also could require companies to tell them.
Though we have doubts about the Supreme Court being the appropriate party to change the status quo, AMIBA has long advocated for national legislation to level the playing field between online sellers and storefront businesses, as articulated in a BusinessWeek commentary by Co-Director, Jeff Milchen.
Based on news reports, such as this from the SCOTUS blog, it appears doubtful that the Justices are ready to repeal Quill.