Justice Kennedy gives hope to advocates of online sales tax

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Retail advocates got a boost this week from an unlikely source in their years-long battle to give states more power to collect sales taxes: the Supreme Court.

Justice Anthony Kennedy wrote Tuesday that it was time for the court to reexamine the position it has held for the last half century – that states can only collect from companies that have a physical location within their borders.

Kennedy’s comment gave new hope to supporters of online sales tax legislation who have seen their priority stalled for many years on Capitol Hill. 

Those advocates still face an uphill climb in their efforts to boost sales tax collections for Internet purchases, but now believe they have new leverage over lawmakers and a new potential avenue for reaching their goal.

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“I think we would be silly not to explore both options,” said Jason Brewer of the Retail Industry Leaders Association. “I think it impacts the lobbying strategy, but I think there will be a period of time where folks review our legal options as well.”

Kennedy might be only one justice out of nine, but supporters and opponents alike say his opinion could carry more weight than others on the Supreme Court. 

For starters, the Reagan appointee is widely viewed as the court’s swing vote. But Kennedy was also on the Supreme Court bench the last time it upheld the physical presence standard, in the 1992 case Quill Corporation vs. North Dakota.

Now, Kennedy says that standard no longer makes any sense, given the rise of online shopping, and that it would be “unwise to delay any longer a reconsideration” of the court’s previous ruling. 

Quill now harms states to a degree far greater than could have been anticipated earlier,” Kennedy wrote in a concurring opinion to a ruling that allowed a business group to challenge a Colorado sales tax law.

The Supreme Court has previously declined to hear cases challenging the physical presence standard, and it also decided against taking a 2013 case in which the online giant Amazon challenged a New York sales tax law.

Some Washington tax analysts believe Kennedy now is seeking to prod Congress into finding an online sales tax solution, with the National Conference of State Legislatures saying that states could be losing an average of $23 billion a year in uncollected revenues.

“I do think this is Kennedy basically asking Congress to sort this out, or else,” said Joe Henchman of the Tax Foundation, a free-market group skeptical of current congressional online sales tax proposals.

Henchman added that Kennedy had traditionally been one of the court’s staunchest supporters of limiting the states’ taxing power. “For him to say the states are getting hosed under the present rules is big,” Henchman said.

Advocates for online sales tax legislation, which also include Amazon and business groups such as the National Retail Federation, say it would correct an unfair advantage that online retailers have over brick-and-mortar stores.  

But opponents, among which are included conservative groups such as Heritage Action and prominent conservative lawmakers including Sens. Ted Cruz (R-Texas) and Rand Paul (R-Ky.), insist the measure would be a de facto tax increase on consumers.

The Senate passed online sales tax legislation, known as the Marketplace Fairness Act, in May 2013. But the House never acted on the measure, which Speaker John Boehner (R-Ohio) strongly opposed. House Judiciary Chairman Bob Goodlatte (R-Va.) released a discussion draft on the issue in January that found little support among retail groups.

Plus, even the bill’s advocates say it faces a tougher path now that Republicans have taken control of the Senate, though lobbyists say the measure’s champions are expected to roll out the Marketplace Fairness Act again in the coming days.  

Still, retail groups say the threat of the courts weighing in could persuade skeptical lawmakers that passing legislation is the preferable route. 

Legislation, for instance, could allow for a transition period for sales tax collection, and install protections for the smallest of online retailers. But it would be difficult to predict how a court might rule on the matter, which analysts say could be more disruptive for consumers and retailers.  

“Kennedy is saying you guys have had 20 years and you haven’t done it yet,” said Jennifer Platt of the International Council of Shopping Centers, another advocate for legislation. “I think there would be some members of Congress who would want that opportunity.”

Brewer, RILA’s vice president for communications, said online sales tax advocates would also search for a court challenge that’s already been launched, given how long lawsuits can take to wind their way through the judicial system. “If you’re starting from scratch, I think that’s a more daunting proposition,” he said.

But some opponents of online sales tax legislation say there’s no reason for concern, given where the debate currently stands on Capitol Hill.

“While some senators may seek to revive the legislative effort in light of Justice Kennedy’s comments, there is very little appetite in Congress to develop a new, convoluted scheme of tax collection,” said Dan Holler, a spokesman for Heritage Action.

Asked if Heritage was concerned about the courts overturning Quill, Holler said simply: “No.”