Led by South Dakota, the states ask the court to overturn its 1992 decision in Quill v. North Dakota, which said retailers can be forced to collect taxes only in states where the company has a “physical presence.”
The case requires the court to consider whether a decision made in the era of mail-order catalogues still makes sense in a time of one-click shopping, when a website can be more appealing and convenient.
Although Internet giant Amazon.com is not a party to the case — the company now collects sales tax in all 45 states that have one, as well as the District — President Trump’s recent criticism of the company’s founder, Jeffrey P. Bezos, has cast a political sheen on the issue. Bezos also owns The Washington Post.
The Trump administration has sided with states that want the taxing power, saying a “virtual” presence in the state is equivalent to a physical one.
Three of the five justices required to overturn Quill have indicated unhappiness with the decision. Justice Anthony M. Kennedy in 2015 said the “legal system should find an appropriate case” for the court to reexamine the decision, which he said is “inflicting extreme harm and unfairness on the states.”
A Government Accountability Office audit said states missed out on about $13.7 billion in 2017.
No wonder Washington lawyer Andrew Pincus, representing eBay, said one of the toughest preconceptions that online retailers must overcome is “that this case is sort of a done deal.”
In fact, he said, as the percentage of large retailers collecting sales tax continues to grow, “the numbers are only going to get better from the states’ perspective,” without disturbing the protections Quill provides for smaller retailers.
Any change in the status quo should come not from the Supreme Court but from Congress, the retailers argue, which could implement national rules rather than open up the companies to having to deal with the specific requirements of what they say are 12,000 taxing jurisdictions nationwide.
But Congress has not acted. And the e-commerce environment has continued to evolve.
Although in the past Americans may have purchased online to avoid paying sales tax, they are increasingly shopping online to get items quickly and without having to leave the house, said Hayes Holderness, a professor at the University of Richmond School of Law who focuses on state and local taxation.
“The convenience of online shopping has come to outweigh the idea that I’m going to buy something online to get it sales-tax-free,” he said. “The data we have show that most people don’t actually pay attention to the amount of sales tax that is being collected. They look at the final cost, of course, but shoppers are becoming more comfortable with the idea that these taxes should be collected and paid.”
Technically, consumers owe the tax no matter how they make purchases. But it’s practically impossible for the state to get the tax revenue unless the company collects the money at the time of sale.
South Dakota, which has no income tax, is especially dependent on sales tax. And after Kennedy’s request for a case — contained in a concurring opinion in a related tax case — the state “answered the call,” it said.
It passed a law requiring retailers with more than $100,000 in annual sales or more than 200 transactions in the state to pay a 4.5 percent tax on purchases. It sued three large online retailers — Wayfair, Overstock and Newegg — for not complying.
Those three companies have long resisted opening warehouses and other facilities — physical presences — that would require them to begin collecting taxes in more states, said David Gamage, a law professor at Indiana University who specializes in tax law and policy.
Courts following the dictates of Quill ruled against South Dakota, and the case quickly moved to the Supreme Court.
Represented at the court by Bethesda, Md., lawyer Eric Citron, the state said the modern economy requires a recognition that the court’s 1992 ruling is obsolete.
Under Quill, the presence of a single salesperson in the state can make a company liable for collecting taxes. Why should its website — “an immersive online marketplace that seeks to replicate the experience of shopping in a store, open for business to every state resident 24 hours a day” — be insufficient, the state’s brief asks.
Computer software lessens the difficulty of correctly applying the right sales tax no matter where the purchase is made, the state says.
More retailers are collecting, including 19 of the 20 largest, according to briefs in the case. Despite Trump’s criticism that Amazon is avoiding its tax obligations, the company, which accounts for more than 40 percent of the country’s online shopping, already collects sales tax on the products it sells, as do most other major retailers, including Walmart, Target and Apple.
News outlets last week reported that the Trump Organization’s online store, TrumpStore.com, collects sales tax in only three states.
Traditional retailers say they still are at a disadvantage to their online competitors.
At BookPeople, an independent bookstore in Austin, chief executive Steve Bercu says it has become increasingly difficult to compete. While Amazon collects taxes on its sales, third-party sellers on the site often do not.
“There is no conceivable, believable excuse for not collecting sales tax,” he said. “No [physical] retailer I know of has an exemption — if I sell one 25-cent thing out of my store, I have to collect sales tax. There’s no reason we should be subsidizing any kind of retailer.”
BookPeople has been collecting sales tax on online orders for several years.
“It used to be complicated — it isn’t anymore,” Bercu said. “It’s just a part of doing business.”
The decision in Quill and an earlier case was based on the “dormant” Commerce Clause, which prevents states from enacting protectionist measures that burden interstate commerce.
The logic holds even in this new economy, Wayfair and the other companies argue.
“Imposing the disparate requirements of 12,000 tax jurisdictions . . . would effectively be a barricade across the Internet superhighway for thousands of companies, who would need to curtail their ambitions and limit their prospective markets,” lawyer George S. Isaacson of Lewiston, Maine, wrote in the company’s brief.
Tony Brocato says having to collect online sales tax would put serious strains on his online appliance business, based in Sheffield, Ala.
He says it is often easier to sell higher-end products — $11,900 Viking refrigerators, say, or a $10,400 General Electric oven range — in other states because the lack of sales tax often offsets freight charges, which can add several hundred dollars to each order.
“It doesn’t seem fair to me to have to pay taxes in an area I’ve never even visited before,” said Brocato, who also sells through eBay. “If we had to start charging sales tax, it would put us out of the market.”
The case scheduled to be heard Tuesday is South Dakota v. Wayfair.