Billions of Dollars from Online Retailers at Stake
States across the country are anxiously watching as the Supreme Court hears arguments in a long-awaited challenge to Quill Corp v. North Dakota, the ruling which prohibits states from collecting sales tax on vendors lacking an in-state physical presence. After years of rejecting petitions from the states, the high court has agreed to consider South Dakota v. Wayfair, a case that state governments hope will finally allow them to collect considerable sales tax that will replenish revenue lost to internet sales providers.
As internet sales continue to put brick and mortar stores in peril at an alarming rate, state revenue has taken a direct hit—the recent closing of Toys R Us is just the latest example of crumbling brick and mortar sources of tax revenue. The meteoric rise of internet commerce is a great factor in sales tax revenue deficits in an increasing number of states. The Supreme Court decided to accept the case in recognition of these closings and the fact that states have been finding ways to circumvent the Quill ruling.
Implication for States
What’s at stake? If Quill is reversed, state and local governments could potentially collect billions of dollars in sales tax from online retailers. According to the nonpartisan Government Accountability Office, state and local governments could have collected up to $13 billion more in 2017 alone if they had been authorized to require sales tax payment from online sellers.
Instead, some states have revised nexus thresholds based on sales figures, others are trying to adopt alternative ways of expanding state law tax collecting authority. More recently, states have enacted laws which place tax collection responsibility on Amazon and similar companies on behalf of the third-party sellers that are on their platforms.
In its case, South Dakota is making the argument that Quill is obsolete given the massive surge in e-commerce sales over the last 26 years. However, the other side – online retailers like Wayfair and Overstock – are challenging that South Dakota’s digital sales tax statute is unconstitutional under Quill. They predict a compliance cost nightmare if they are forced to collect tax in multiple states with widely varying definitions of exactly what is taxable.
Many online retailers believe that matter should be settled by Congress and not the court. Still, while bills have been introduced in both the House and Senate, Congress has never taken up the issue.
President Trump has been quite vocal in his position that online retailers like Amazon pay state and local tax.
Will the Supreme Court establish a firm threshold for tax rules and provide states guidelines, or will Congress establish restrictive thresholds, preventing states from tax revenue increases?
Both online retailers and state governments are holding their collective breaths as they await the court’s decision, which is expected by late June.
We will closely monitor the Supreme Court’s action and provide further updates as developments occur.
Questions about state and local tax issues? Contact us today!
About Josh Hoffman: Josh is a Manager in the Tax and Business Services department and service line leader for State and Local Tax. He offers a variety of tax services to clients including individual, partnership, corporate and not-for-profit tax preparation, and assists clients with tax planning.