From The Wall Street Journal:
Billions of dollars of goods sold each year by independent merchants on Amazon.com and other online marketplaces would be vulnerable to state sales taxes for the first time if justices decide to reverse a quarter-century-old precedent in a case before the Supreme Court this week.
In the case, South Dakota is seeking to overturn a longtime precedent under which states can’t require retailers to collect sales taxes unless the companies have a physical presence in the state. While Amazon.com Inc. itself collects sales taxes on its own products, it does not on most others’ sales through its platform.
. . . .
The current tax rules—from the era of mail-order catalogs—helped fuel the rise of internet commerce and spurred frustration among brick-and-mortar retailers, shopping-mall owners and state governments.
Tax and legal experts expect the court to overturn the precedent, freeing states to collect levies on future cross-state transactions. It isn’t clear what new standard might take its place or what rules states might impose.
. . . .
The biggest effects would be felt on online marketplaces, where between $3.9 billion and $6.2 billion in taxes could have been collected on goods sold by smaller vendors in 2017, according to the Government Accountability Office.
. . . .
The 1992 opinion, in the case of Quill Corp. v. North Dakota, held that the Constitution’s commerce clause limited interstate tax enforcement without congressional assent. Justice John Paul Stevens said it was up to Congress to set nationwide rules for cross-border sales-tax enforcement, but Congress hasn’t done so.
. . . .
State governments and brick-and-mortar shops argue the 1992 precedent harms state treasuries and disadvantages taxpaying homegrown businesses. In a related case three years ago, Justice Anthony Kennedy, who voted for the Quill ruling in 1992, filed a concurring opinion suggesting the time had come to reconsider the question. South Dakota quickly enacted a tax statute designed to give the high court such an opportunity.
The state sued Wayfair, an online home-goods retailer, and other larger internet-based sellers. The South Dakota Supreme Court sided with Wayfair under the 1992 precedent, and the state then appealed. Wayfair says it collects and remits taxes on about 80% of its sales.
States, large retailers, shopping-center owners and the Trump administration want the court to let states extend sales-tax collections to online merchants based elsewhere. They argue that technological advances made the physical-presence standard set out in the 1992 precedent obsolete and that the ruling has left holes on Main Streets and in government budgets.
South Dakota asks the court to extend state authority over merchants with an “economic presence” in their territory, arguing that it is a better reflection of business ties to a state than the 20th century “physical presence” standard. The South Dakota law would extend the collection mandate to sellers doing at least $100,000 of business or conducting more than 200 transactions with state residents.
. . . .
Conservatives and online retailers warn about expanded state power and fear states would reach outside their borders to audit sellers with no representation.
. . . .
“A world in which state tax power is unbounded by geography is undoubtedly a world that is bad for Amazon,” said Andrew Moylan, executive vice president at the National Taxpayers Union Foundation, which wants the court to preserve the physical-presence standard.
Link to the rest at The Wall Street Journal
PG says the original 1992 Quill decision was and is well-founded.
The Commerce Clause of the US Constitution is found in Article 1, Section 8, Clause 3 of the U.S. Constitution, which gives Congress the power “to regulate commerce with foreign nations, and among the several states, and with the Indian tribes.”
The Commerce Clause has usually been held to grant Congress the power to regulate interstate commerce and to restrict the regulatory powers of the states with respect to interstate commerce. The restrictions on state regulation are sometimes described as the Dormant Commerce Clause.
The particular concerns underlying the Dormant Commerce Clause is to prevent states from making laws that discriminate against interstate commerce. Specific types of legislation that provide benefits to in-state businesses that give them advantages over those located outside the state have regularly been prohibited.
One of the rationales for previously prohibiting the collection of sales taxes on businesses located outside of the state is that the benefits of sales taxes were bestowed inside the state, not on any business outside the state. Third party delivery services like UPS that deliver products from out-of-state sellers to buyers inside of a state pay all the taxes associated with their in-state activities.
Additionally, every state with which PG is familiar imposes a Use Tax at the same rate as the state’s sales tax upon state residents who purchase good from a vendor outside the state that doesn’t collect in-state sales taxes. The idea is that the in-state resident who benefits from state services will pay a tax for using an out-state product or service in the state and the state won’t be shorted on tax revenues.
Actually collecting use taxes from local voters tends to be bad politics, however, so to the best of PG’s knowledge, few states attempt to collect such taxes from their own residents, restricting use tax enforcement to large businesses.
Proponents of sales taxes also argue that computer software makes the calculation and collection of sales taxes on a nation-wide basis easy to implement.
Unfortunately, state sales tax laws are often quite complex with a variety of different sales tax rates on different products. Different localities within a state have differing rates as well. Towns and cities can impose additional sales taxes for sales made within their borders. In some geographic areas, local businesses are required to collect sales tax surcharges to support local public transit services and in other areas, no surcharges are imposed.
While sales tax laws that specifically discriminate against businesses outside of a state by, for example, charging a higher sales tax rate to out-state businesses than on in-state businesses would probably still not pass constitutional muster, but differing enforcement treatment for out-state businesses could provide a defacto surcharge for such businesses.
State taxing authorities have a variety of sales tax enforcement methods and the power to impose fines and penalties for noncompliance. For example, those authorities can conduct audits of business records to ensure compliance with sales tax laws.
If a small New Hampshire home-based craft business decided to move away from Etsy and set up its own website to provide better service and make higher profits, how can that business effectively deal with a sales tax audit in Hawaii? Such audits may require the seller to appear with all its sales records at an in-state tax enforcement office.
PG also suggests that requiring online businesses to collect sales taxes will tend to drive them sell through large businesses like Amazon rather than build their own online service and distribution system. Such behavior will tend to reduce competition for large and established incumbents. The next Jeff Bezos might be discouraged from starting a new Amazon because of the additional complexities involved in tax collection and compliance.
Consumers might also be harmed to a larger extent than the cost of paying sales taxes to out-state sellers. PG suggests that it would not be difficult for online businesses to geo-fence visitors to their websites so purchasers from high-tax/difficult compliance states pay a higher sales price (in addition to sales taxes) for the additional hassle for the seller of dealing with the taxing authorities of their states.
For more information written to be understood by non-lawyers, see the website of the Legal Information Institute, sponsored by Cornell University School of Law.