Supreme Court weighs future of online sales taxes

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The Supreme Court on Tuesday appeared to be grasping for answers on how to resolve a dispute on online sales taxes, with no clear indication on how the justices will rule.

The court heard oral arguments in the case of South Dakota v. Wayfair, which centers on a South Dakota law that requires certain out-of-state online retailers to collect the state’s sales taxes. 

South Dakota asked the Supreme Court to uphold its law and to overturn a 1992 ruling, Quill v. North Dakota, that prevents states from compelling businesses to remit their sales taxes unless they have a physical presence in the jurisdiction.{mosads}

“There are two very significant consequences brought about by Quill: First, our states are losing massive sales tax revenues that we need for education, healthcare, and infrastructure,” said South Dakota Attorney General Marty Jackley. “Second, our small businesses on Main Street are being harmed because of the unlevel playing field created by Quill, where out-of-state remote sellers are given a price advantage.”

Wayfair argued that the court should uphold the 1992 precedent.

George Isaacson, who is representing the online retailer, said that if the ruling were overturned, the result would be “chaotic” for businesses and would be particularly harmful for small businesses.

“If you increase the cost of admission, if you have barriers to entry, one of the inevitable effects is going to be that those small- and medium-sized companies are going to be deterred and there will be even greater concentration by the largest retailers,” he said.

Some of the justices seemed sympathetic to South Dakota’s argument that their law helps small brick-and-mortar businesses compete with online retailers.

Justice Ruth Bader Ginsburg asked Isaacson why subjecting every business selling in a state to the same sales tax obligations isn’t “equalizing rather than discriminating.”

Justice Neil Gorsuch said that past Supreme Court rulings have focused on a small mail-order industry, and “those concerns seem a little antiquated today.”

Other justices asked questions that were sympathetic to Wayfair’s concerns that if Quill were overturned, thousands of jurisdictions could require online businesses to collect their sales taxes — potentially even retroactively, creating a compliance nightmare.

“So you’re introducing now a whole new set of difficulties to put be — to put behind something that’s been in place for 30 years now?” Justice Sonia Sotomayor said.

Justice Samuel Alito said the South Dakota law was a “test case” that was designed to be fairly reasonable. He asked if it might be the case that “states that are tottering on the edge of insolvency and municipalities which may be in even worse position have a strong incentive to grab everything they possibly can?”

Much of the discussion during the oral arguments focused on whether it was better for the Supreme Court to overturn the 1992 ruling or to let it stand and have Congress act on the issue.

The 1992 ruling gave Congress the final say in the remote sales tax issue, and lawmakers in recent years has been divided over how to change the system.

The Senate, in 2013, passed bipartisan legislation — whose leading sponsors included Sens. Lamar Alexander (R-Tenn.), Heidi Heitkamp (D-N.D.) and Mike Enzi (R-Wyo.) — that would allow states to require online retailers to collect their sales taxes if the states simplified their sales tax laws. But some conservative lawmakers and Democrats in states without sales taxes were wary of that legislation, and House Judiciary Committee Chairman Bob Goodlatte (R-Va.) has released proposals that take a different approach.

Goodlatte, Alexander, Heitkamp and Enzi all attended the oral arguments. Goodlatte and some other lawmakers filed a friend-of-the-court brief in support of Wayfair, while Alexander, Heitkamp and Enzi filed a brief supporting South Dakota.

Justice Elena Kagan said it “gives us reason to pause” because Congress hasn’t acted.

“This is a very prominent issue which Congress has been aware of for a very long time and has chosen not to do something about that,” she said.

Jackley noted that Congress hasn’t acted in the more than 20 years since Quill was decided and that overturning the ruling would “reset the default.” But Isaacson said Congress would be best suited to create uniformity in how sales taxes are collected.

Ginsburg suggested that it might be easier for Congress to fix the system if Quill were overturned. Lawmakers, for example, could then set the minimum number of sales in a state that an online retailer would have to have before being required to collect sales taxes.

“Congress doesn’t want to look like it’s increasing taxes, but fixing something like that would not encounter the same hurdle,” she said.

The Trump administration argued that South Dakota’s law should be upheld, with Deputy Solicitor General Malcolm Stewart participating in the oral arguments on behalf of the state.

Stewart said the administration thinks that the 1992 ruling, which dealt with mail-order catalogs, doesn’t say anything about “the role of a pervasive internet presence in establishing sufficient contacts with the state to allow for the collection duty.”

He also said the Supreme Court’s choice in the case is not necessarily a binary one of simply choosing to uphold the Quill decision or overturn it. He suggested that the court could decide whether or not the South Dakota law is constitutionally sufficient while leaving to another day to decide whether other, similar laws pass muster.

Justice Stephen Breyer said that each side provided different data and arguments but they both make sense.

“Both are logical,” he said. “How do I decide who’s right?”  

Tags Bob Goodlatte Heidi Heitkamp Lamar Alexander Mike Enzi North Dakota Sales taxes Supreme Court

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