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Supreme Court Weighs Widening States’ Reach on Online Sales Taxes

16 April 2018

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.

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28 Comments to “Supreme Court Weighs Widening States’ Reach on Online Sales Taxes”

  1. Most appreciate reading your detailed and nuanced posts like this one, PG.

    Taxes are not my purview – I pay what they tell me to pay when they won’t give me my merchandise otherwise.

    But your analysis had a lot of good points, leading to Hmmms!

    In this world of tiny, fragmented tax laws, it is hard to know what to think or do – NJ requires payment of tax on items bought in Pennsylvania precisely to avoid the local tax! Whistling in the wind, expecting individual taxpayers to remember and pay at tax time.

    My dad was an honest man and paid his American taxes all the years he lived in Mexico, and had Medicare (which they couldn’t use out of the country) and his and mother’s Social Security checks as a small but steady stream of dollars. Sometimes it was their only income. But he was unhappy paying any unnecessary taxes in Mexico because he perceived the money wasn’t going where it was supposed to go. Hard position for an honorable man.

  2. Absolutely agree that the Commerce clause puts the responsibility for deciding how local taxes are applied to other states in Congress’s lap. That ND is trying to force the issue via the courts is appalling, but if the SCOTUS decides to be an activist court, it could pay off. The real problem here is the 17th amendment, which changed the way senators are elected. If the states legislators (instead of the people) still elected senators, they could force the US senate to address issues like this.

  3. Heh, if you’re one of those that think the big players are trying to run the small players out of business then this looks like it was made for them.

    Just trying to ‘think’ about this probably has our POTUS biting the back of his own neck. One the one side he is big business – on the other this will make large companies all the more powerful and important to the small sellers.

    I do disagree with the OP that this would be ‘bad’ for Amazon. It might put a small crimp in Amazon’s style, but Amazon is already collecting those taxes. What this will do is hit many other companies so much harder … (I know there are companies that sell taxing software, but taxes change and the constant updates would cost more than my ebooks make – never mind if each state then wanted to do an audit! 😛 )

  4. PG, help me out here as I’m a bit confused about this. Wouldn’t it make sense to task the seller to collect the tax that, currently, most internet shoppers don’t bother to pay?

    For example, currently, if an SD seller sells something to an ND customer but has no presence in ND, then no sales tax is charged and it is up to the ND buyer to pay the tax, something that often does not happen.

    However, a change in the law could require the SD seller to collect the tax for ND and remit it to ND. This would simply be doing what the ND buyer should be doing, but doesn’t. I understand how it is a burden, but the tax is being paid by the buyer. What exactly is the problem?

    • The problem is the seller having to know the tax required for every single address in the country. (Taxes which can change every time some city/town/school district needs more money for something.)

      Then there’s the added fun that ‘any’ of those states can then request a tax audit (at the seller’s expense) to make sure the proper taxes have been paid.

      This will kill off crags list and the like (heck, I can see a ‘state’ buying something just so they could then run an ‘audit’ on the seller – after the first couple of those come to light no one will dare try selling things on their own.)

    • By making the business collect it, you run into the situation that he references. You force every business online or mail order to understand the sales tax laws of every single community, county, state, special tax district in the country.

      While the states would love to push the burden onto every business in the US to be their collection agency, that does cost money and time for all businesses. Could you imagine your potential liability if you clean out your garage on ebay and make sales to four different buyers? what if it was 40. or 400. How could you manage that?

      And i agree with Suzie- the 17th amendment gets no where near the blame for some items it should. By not allowing states a direct voice in the federal system it literally destroyed the federalist model – at least in my humble opinion.

      • You force every business online or mail order to understand the sales tax laws of every single community, county, state, special tax district in the country.

        Exactly. Illustration: suppose a political entity — we’ll call it Too-Big-For-Its-Britches-Town — decides to impose a tax on candy. Simple … or is it?

        1) Is licorice candy, or just when it’s called “Twizzlers”? 2) Is it candy if you buy it at the health food store and it’s made out of the actual substance that taxonomists call licorice?
        3) But if it’s Darrell Lea’s Australian red licorice (real licorice is black), is it now candy?
        4) Suppose the red licorice is, Idunno, “organic”? Will the makers roll over for the branding damage they might sustain if you tax them as candy? Or will they demand a carve out, like how one city’s tax on sugary sweet drinks applied to Big Gulps but not Starbucks Iced Caramel Macchiatos?

        Should the seller the next town/state over really be expected to care about the answer to these questions? Remember we have 50 states, from sea to shining sea, and they’re all inhabited with counties which are in turn inhabited with villages, towns, and cities. Even Alaska, which is mostly filled with snow and Kodiak bears ;‑)

    • Real life example. Say I buy a used book directly from someone in Kentucky. That person has to look up my state (TX) and county [redacted] and municipal tax rules, and see which apply and how. Because my city straddles two counties, the seller must determine which package of taxes he needs to collect, and where to send each parcel of money to. And when it ends up in fractions of a cent? Yeeps.

      Oh, and is this personal use, or a professional purchase for a business? Because that can change the taxes, too, in some places.

    • Wouldn’t it make sense to task the seller to collect the tax that, currently, most internet shoppers don’t bother to pay?

      Wouldn’t it make more sense to have the seller send the state a list of all the names, addresses, and sales amounts of residents who bought stuff? Then the state could use whatever means it chooses to collect. Today’s computers could churn out tax bills in no time. The state could then send the list to all the counties, and they could send it to all the municipalities and taxing authorities. God Bless computers.

      Or maybe require all instate banks to deduct sales tax from any online VISA transaction with out of state vendors? Banks are really good with computers.

      Or maybe enforce current state law against the scofflaws who ignore the use tax?

      • 1984 called, they want their plot back! 😉

        What could be more big brother than the state/city/county know what each and every household bought and for how much? (They’d have to know the ‘what’ to know which taxes to apply …)

        • No need to reveal what was bought, just the total dollar amounts.

          • “No need to reveal what was bought, just the total dollar amounts.”

            Wrong. Different locations tax differently on types of items. So they’d need to know every single thing that was sold.

      • so you don’t care about privacy and thing that the state government should know exactly what every person has purchased?

        remember, the state would then have to look up the local taxes to figure out how much to pay to the cities and counties.

        How much of a cut will they demand for that service?

        Will they need to send the details of all your purchases to the city and county officials so that they can check things as well?

        • I said, “Wouldn’t it make more sense to have the seller send the state a list of all the names, addresses, and sales amounts of residents who bought stuff?”

          Why would the state need to know the specific items?

          • because the tax is different on different items, and unless the seller knows the tax laws, they can’t say what the item categories are, so they would have to send all the details of what was purchased so that the state could determine what the correct tax would be.

            • That’s a problem for the state. They currently expect their citizens to figure it out and pay the use tax. They can’t expect someone else to do all the work. (Seems the USSC wasn’t all that impressed with the computers.)

    • Not to mention the problems of administration. To pay the tax, often you have to separately register with each state, country, city, school district, etc. who is taxing that transaction. Then, most of these require monthly or quarterly filings. If you don’t file, they typically impute taxes to you and charge you on the assumed business activity. To get out, you may have to file more paperwork saying you are no longer selling there – until the next order from that location when you would have to register again.

      There are something like 6,000 governmental subdivisions in the US that could potentially collect sales tax of some sort. It would be prohibitive for small business to engage with this kind of tax regime.

  5. ‘Splain this to me, please. Howscome Article 1, Section 9 of the Constitution doesn’t control? It appears to this uneducated lout that it forbids taxes on interstate commerce. Period. End of discussion. Sucks to be the states, greedy for tax revenues. Feature, not bug, from the perspective of online shoppers.


  6. By the decision in Wickard v. Filburn, 317 U.S. 111 (1942), the US Congress can prohibit you from growing tomatoes in your home garden, even if you do not intend to sell any or give them away but use them only for home consumption. That’s the law, but I do not like it.

    PG, I was thinking — usually a fruitless exercise but I sometimes like to indulge myself. You know, these ebooks on my Kindle were not sold to me. They were licensed to me. I’m thinking the sales tax Amazon charged did not and does not and will not apply, and I am entitled to a refund. And so are many others. Many, many others. I’m thinking maybe I should come out of retirement and file a class action suit against Amazon to collect on behalf of all those millions of customers.

    Any opinion you would like to share about my thought?

    • The counter-argument is that you are buying the license, not the ebook.
      I wouldn’t mind seeing it litigated because the precedent would force tradpubs to pay authors better ebook royalties based on license vs sale terms.

    • hmm, I wonder how receptive amazon would be to such a lawsuit. If they didn’t have to collect sales taxes on e-books, they would undercut p-books even more…

    • Over in the EU don’t they like to tax ebooks even higher – as a service/software rather than a book/product?

    • I read the Texas statute, and it is clear that an ebook is ‘tangible personal property’ under the law: Sec. 151.009. [F]or the purposes of this chapter, the term includes a computer program . . . .

      It is not clear that a license is a ‘sale’ under the law, but is is not clear that it is not.

      Not a slam-dunk case. So I guess I’ll stay retired.

  7. The hearing did not go too well for South Dakota.

    When Roberts and Sotomayor are on the same side, things look pretty clearcut:

    “The justices also worried about the economic impact on small companies that do business on the internet.

    “I’m talking about the added cost of doing business for the small businessman, someone – one of the briefs said it was a $250,000 cost to implement one of these sales programs, one of these sales tax programs,” Justice Sotomayor told South Dakota’s Jackley.

    Chief Justice Roberts wanted to know if there were protections for the small business person, “a small business using the Internet may have greater burdens than Amazon and, therefore, they have a constitutional claim under your position, or, under your position, can the states impose the burdens on any — any micro-business?”

    • To bad they didn’t give SD the option of being a test case. 😉

      As in let the sellers in SD start the ball rolling with their online companies collecting and paying the other states the proper taxes – with random tests/audits to see how well/poorly they’re doing. After five years – if all the bugs have been fixed, it’s cheap enough for even little one person shops, and there haven’t been any errors in the last six months – the other states can think about it …

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