Stop bullying small businesses

In the never-ending search for new revenues to fill state coffers, South Dakota has approved a troubling new tax law. The law is in direct defiance of the Supreme Court and settled case law, and what’s more, the Mount Rushmore State knows it’s unconstitutional.

The law requires small- and medium-sized businesses that have no physical presence to collect sales taxes from their South Dakota-based customers. The state’s target? Remote sellers from around the country that aim to provide goods to residents via catalog or online. What’s worse, South Dakota has sued several such businesses and put them in legal jeopardy. This is nothing more than legislative and legal bullying – “pay up or we will sue you.”

{mosads}In response, the American Catalog Mailers Association (ACMA) and NetChoice have jointly filed a complaint against the state, urging that the statute be declared invalid. The law in this case is crystal clear, and South Dakota’s law should be invalidated by the courts.

The underlying dispute in this matter goes back 24 years. In 1992, the Supreme Court found in the case Quill Corp. v. North Dakota that, under the Commerce Clause of the Constitution, states do not have the power to require sales tax collection by out-of-state sellers having no physical presence in that state. The vote was not close, 8-1 on that critical constitutional issue.

In describing its rationale, the Court said that a company whose only contact with the state is communicating with customers via remote means, such as a mailed catalog, lacks a “physical presence” in the state, and therefore is not required to collect sales tax.

Despite this unambiguous ruling, South Dakota passed a statute (SB 106), effective on May 1, imposing new sales and use tax collection obligations on remote sellers. The state’s novel “economic presence” classification defines retailers as having nexus within the state if they exceed $100,000 in annual sales or even just 200 remote sales transactions with South Dakota customers per year. This applies not only to physical sales, but also sales of digital goods and online services. 

South Dakota’s actions get even more questionable. The state acknowledges in its suit that its position is tenuous at best. In the first paragraph of the summary of its lawsuit, South Dakota writes. “The State acknowledges that a declaration in its favor will require abrogation of the United States Supreme Court’s decision in Quill Corp. v. North Dakota.”

Essentially, South Dakota’s course of action is equivalent to legislative malpractice. It represents exactly the type of bad governance that makes Americans cynical of big government.

If states are allowed to reach across their borders to tax or regulate businesses that have no standing and no presence then this becomes open season on states to regulate, audit, tax, and control virtually any business entity with impunity. Out-of-state businesses have no redress, no representation and no way to fight these egregious and ill-considered actions.

In Quill, the Supreme Court expressed a deep concern over the compliance burdens that would result from a remote seller being forced to comply with the various tax obligations “imposed by the Nation’s 6,000 plus taxing jurisdictions.” Today, that problem would be even worse, because there are now over 10,000 sales tax jurisdictions in the United States at the state and local government levels.

As Justice John Paul Stevens noted in his majority opinion in Quill, because of the multiplicity of tax jurisdictions “the many variations in rates of tax, in allowable exemptions, and in administrative and record keeping requirements could entangle [a mail order house] in a virtual welter of complicated obligations.” What is needed is real simplification of our nation’s overgrown and confusing array of state taxes.

South Dakota and other states are using their legislative muscle to put retailers in legal jeopardy. Rather than sit on our hands, it’s time for the business community to rally around a plan being developed by the Chairman of the House Judiciary Committee Bob Goodlatte (R-Va.).

The Goodlatte approach would dramatically simplify how sales tax is collected and create a level playing field for all retail businesses, because it is based on the location of the seller, not the buyer. This is the system already in place for brick and mortar retailers, which collect only where their stores are physically located. It works, it is simple and, most importantly, it is fair.

Bottom line: While Congress sorts this out, states should not act unilaterally and impose massive tax and legal obligations on remote sellers in defiance of the Supreme Court.

Hamilton Davison is both the co-founder of TruST (True Simplification of Taxation coalition) and the president of the American Catalog Mailers Association.