How Did the Supreme Court Change Online Sales Taxation?
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ISSUE BRIEF 06.26.18 How Did the Supreme Court Change Online Sales Taxation? Joyce Beebe, Ph.D., Fellow, Center for Public Finance Last week, the U.S. Supreme Court ruled presence in the state;5 this is the result of that states can impose sales taxes on out- a 1992 Supreme Court ruling, Quill Corp. of-state retailers, even if they do not have a v. North Dakota.6 In 2017, South Dakota’s physical presence in the state. The decision Supreme Court struck down the state’s ends months of suspense and attention on digital sales tax law (S.B. 106); South Dakota the future of e-commerce. In July 2017, a then brought the case to the U.S. Supreme House subcommittee heard testimony on Court, in hopes of overturning Quill. the right of states to collect sales taxes Although earlier estimates varied,7 a from out-of-state merchants that do not recent U.S. Government Accountability Office have a physical presence in the destination (GAO) report indicated that based on current state.1 Several states, eager to defend their law, state and local governments were right to tax remote sellers, had passed already able to collect most remote sales tax “notice and reporting” laws, which require revenues that would be owed.8 Most large remote sellers to either collect sales taxes or remote sellers are either established retailers submit an annual report of each consumer’s that already have physical stores in many purchases to the state government.2 Some states, or have entered into agreements states have targeted marketplace providers with state governments to voluntarily collect such as Amazon and eBay, which previously sales taxes regardless of physical presence. have not collected all sales taxes from However, the study showed that if states In a split 5-4 decision, third-party sellers.3 Not absent from the could require out-of-state merchants e-commerce debate is President Donald without a physical presence to collect sales the U.S. Supreme Court Trump, who in March 2018 posted a tweet taxes, states would be able to expand their overturned Quill and accusing Amazon of treating the U.S. Postal collectible sales tax revenue by $8 to $13 ruled that states can Service as its “delivery boy” and of paying billion in aggregate for 2017.9 For states that charge out-of-state 4 little taxes to state and local governments. do not have personal income taxes and rely retailers sales tax even This issue brief reviews the implications heavily on sales taxes, such as Texas, the of the U.S. Supreme Court ruling and the revenue gain is close to the $1 billion range.10 if they do not have a legislative developments in online sales The report further provided segregated physical presence in taxation over the last 12 months. estimates showing that collectible rates and the state. associated revenue gains vary significantly by different types of sellers. For internet RECAP: UNDERSTANDING THE KEY retailers, the current collectible tax revenue ISSUES AT STAKE can reach 86 percent, indicating an additional 14 percent increase in collectible Prior to the ruling, states could not impose revenue with the reversal of Quill. The a sales tax collection obligation on remote estimates for marketplace sellers show a retailers that do not have a physical RICE UNIVERSITY’S BAKER INSTITUTE FOR PUBLIC POLICY // ISSUE BRIEF // 06.26.18 completely opposite picture: only 14 percent to only traditional mail order retailers whose of revenue was collectible under Quill; single connection to a state is by mail or overturning the ruling likely will generate common carrier.14 large potential revenue gains. In fact, half of Another viewpoint Quill challengers the potentially collectible revenue gains ($4 expressed was that local brick-and-mortar to $6 billion) would come from being able to businesses are treated unfairly because of collect from marketplace sellers. the inconsistent tax collection standards Not surprisingly, both proponents between local retailers and remote sellers. and opponents of Quill drew support from They also pointed to states’ increasing fiscal the report: Quill advocates have said that deficits, which have been worsened by the since most sales tax revenues are already inability to collect taxes from remote sellers. in the tax net, the issue is more about The supporters of taxing remote sellers collection. Because large retailers are generally disagreed that compliance costs already collecting the taxes, changing the are prohibitively high, pointing to the current law means compliance burdens extensive use of computer technology by would mostly fall on small- and medium- merchants to reduce the burdens and the sized enterprises (SMEs). Quill challengers longstanding simplification effort by states interpreted the results differently—i.e., to expand the Streamlined Sales and Use Tax based on the perspective of SMEs—arguing Agreement (SSUTA).15 Under the agreement, that the lost revenue jeopardizes jobs collection and administration laws have at SMEs in local communities. They also been simplified and harmonized across pointed out that although remote sellers member states. Tax bases, administrative benefit from roads and local infrastructure requirements, exemptions, and tax rates to reach their customers, they fail to pay are standardized; states also function as sales taxes that fund such state and local the single central authority for all sub-state government services. level taxes. The court concurred A viewpoint related to the compliance with Quill opponents’ cost issue deferred to another Supreme arguments that the A LONG-AWAITED DIRECT CHALLENGE Court ruling, which indicates that when a state regulates a business that engages in physical presence rule The U.S. Supreme Court agreed to hear South interstate commerce, incidental burdens Dakota v. Wayfair, Inc., et al., in January. gave remote sellers an may be unavoidable; Quill opponents argued Prior to the mid-April oral argument, various advantage over brick- that South Dakota’s law imposing sales stakeholders collectively filed 40 amici curiae and use tax collection requirements on and-mortar businesses (friend of the court) briefs, offering their remote sellers constitutes such an incidental and deviated from the views, expertise, and insights on the issue. burden.16 Stated differently, the fact that a economic reality of the business is conducting interstate commerce Arguments to Overturn Quill current online sales does not relieve it from tax collection environment. The argument most frequently cited by Quill duties, which add to the cost of doing opponents was the rapid advancement business.17 Like growing pains, as a business of internet commerce and the significant successfully expands, its compliance change of the business environment. They costs increase. The issue is whether the argued that the physical presence rule obligations are excessively burdensome is outdated,11 especially considering the relative to the benefits, and whether the fact that the Quill ruling was based not on burdens are substantially different across its own constitutional merit, but on the states. Quill opponents have said that the principle of stare decisis12 that governs benefits outweigh the costs, and that the another 1967 Supreme Court ruling involving uneven compliance burden across states mail order retailers.13 The Bellas Hess case can be resolved by replacing the physical was ruled 50 years ago, before the invention presence rule with a balancing test: one of the internet. As such, U.S. Solicitor state’s high compliance burden could be General Noel Francisco recommended that subject to a higher threshold than another the Supreme Court limit Quill’s application state’s low burden system.18 2 HOW DID THE SUPREME COURT CHANGE ONLINE SALES TAXATION? Finally, they contended that the Illinois, New York, and Texas—are not end of Quill would not necessarily harm members of the SSUTA. Thus, Quill supporters interstate commerce because safeguards contended that the current sales and use tax against detrimental effects such as reduced compliance procedure is still complicated interstate business activities and overly and non-uniform. There is still a significant burdensome compliance procedures are need to simplify the process and reduce the still in place. For example, Congress still compliance burden for companies. possesses constitutional rights to regulate Some Quill proponents pointed out interstate commerce; it could enact that although South Dakota’s statute legislation to protect interstate sellers.19 applies prospectively, a complete overturn In addition, the lower courts can certainly of Quill may mean that some states could act to prevent states from imposing undue retroactively impose the sales and use tax burdens on interstate sellers.20 collection obligation on remote sellers.24 States are expected Eight states have enacted economic to remove the Arguments to Uphold Quill presence rules that contradict Quill’s notice and reporting The arguments in support of Quill largely physical presence requirement, and these requirements, focused on compliance costs, thresholds, states are seeking to enforce their rules a welcome development to various degrees. Another 20 states and retroactivity. on efficiency and Quill advocates argued that state have statutes, regulations, or policies governments have generally overstated that require retailers to collect sales privacy protection the effectiveness of sales and use tax and use taxes to the extent permitted grounds. The compliance software, and that compliance by the Constitution.