U.S. Supreme Court Hears Online Sales Tax Case

April 20, 2018

The United States Supreme Court heard oral arguments on April 17 in South Dakota v. Wayfair Inc., a case that could have major implications for collections of sales taxes on online purchases. The case centers around a law which took effect in South Dakota in 2016 and requires businesses that sell more than $100,000 in goods in the state or conduct 200 or more transactions per year with South Dakota customers to collect and remit sales taxes. South Dakota argues that the Supreme Court should overturn the precedent set in 1992 by the Quill Corp. v. North Dakota case, in which the Court reaffirmed an earlier decision and held that a state may not require an out-of-state retailer without a physical presence in the state to collect sales taxes. South Dakota contends that the growth in online sales since the Quill case (which dealt with mail order sales) has changed the retail landscape significantly, and that compliance burdens for retailers have been lightened by the development of tax compliance software. Wayfair and its fellow respondents in the case (several other online retailers) argue that collecting sales taxes levied at different rates by different taxing authorities remains burdensome, particularly for smaller retailers; that sales tax is already being collected on most online purchases; that failing to uphold Quill will open the door for states to impose retroactive liability on retailers; and that the Court should defer to Congress to resolve the issue under its power to regulate interstate commerce.

Several bills to address the issue have been considered by Congress in recent years, most notably the Marketplace Fairness Act, which passed the Senate in 2013, but failed to emerge from the House. When major transportation funding legislation was enacted in Virginia in 2013, state policymakers signaled their expectation that Congress would eventually pass a version of the Marketplace Fairness Act by embedding provisions in the transportation bill for the disposition of additional revenue that would be generated by the enhanced collection of sales and use tax, contingent on Congressional passage of the Marketplace Fairness Act or similar legislation authorizing the state to require remote sellers to collect state and local sales and use tax. To date, no such legislation has been enacted by Congress.

In the meantime, Virginia has attempted to improve collections of sales and use tax on purchases made online within the existing legal framework under Quill. The state reached an agreement with Amazon in 2013 to collect taxes from its customers on sales made by Amazon, and in 2017, legislation was enacted to clarify that storage of inventory within the Commonwealth constitutes nexus for an out-of-state seller, thus requiring such a seller to collect sales tax, a change that the state Department of Taxation estimated would result in approximately $21 million per year in additional state and local sales and use tax collections. Since the tax is owed by the consumer whether the seller collects the tax or not, the Department of Taxation has also revised the individual income tax return form to emphasize the taxpayer’s obligation to report sales and use tax owed on online, mail-order, and out of state purchases. Despite these efforts, former Secretary of Finance Ric Brown estimated in October 2017 that approximately $229 million per year in sales tax for such purchases is owed but not collected.

Media reports on the questions asked during oral argument suggest that the justices’ views on the issue vary. As the Tax Foundation pointed out in an analysis of the issue, the Court could take a variety of approaches to the case, including upholding the Quill decision and striking down the South Dakota law, issuing a narrow ruling upholding the South Dakota law, issuing a broad ruling that would provide general authority for states to compel the collection of taxes by out-of-state sellers, or upholding the South Dakota law and providing guidance to states on a system of taxation of remote sellers that meets Constitutional muster. A ruling is expected in June.

VACo Contact: Katie Boyle

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