Sales tax battle moves to the Supreme Court

The battle over states’ power to collect sales taxes on internet sales will be front and center at the Supreme Court next month.

The court is scheduled to hear oral arguments in April about whether states can require out-of-state online retailers to collect their sales taxes.

The Trump administration, several members of Congress, state governments and major retail groups want the Supreme Court to uphold a South Dakota sales tax law. They say states should be able to require the collection of sales taxes from businesses with a significant economic presence in their jurisdictions.

Other lawmakers, conservative groups and e-commerce groups warn that a ruling in favor of South Dakota would wrongly chip away at limits on state power.

The Supreme Court ruled in the 1992 case Quill v. North Dakota that states can only require remote sellers to collect their sales taxes if the business has a physical presence in the state. While taxpayers are supposed to pay sales taxes on remote sales made online, they rarely do so.

As online shopping has become more prevalent, states have been pushing to have more authority to require remote sellers to collect their sales taxes. They have pressed for congressional action on the issue while also seeking to have the Supreme Court revisit the 1992 decision.

The case before the Supreme Court now, South Dakota v. Wayfair, centers on a law that South Dakota passed in 2016.

The law requires out-of-state online retailers to collect sales taxes if the business has more than $100,000 in annual sales of products to South Dakota residents or more than 200 separate transactions involving state residents.

In a brief filed last month, the state argues that the Supreme Court should find that its law complies with the Constitution’s dormant Commerce Clause. South Dakota argued that an “economic presence” standard makes more sense than a physical presence standard.

“Today, out-of-state retailers can have a strong connection to any given forum — and so derive comprehensive economic benefits from that forum’s market and state services — without any ‘physical’ presence at all,” the state wrote.

A number of stakeholders filed friend-of-the-court briefs in recent days making the case for the constitutionality of South Dakota’s law.

Notably, the Trump administration argued in a brief filed Monday that “the Court should resolve this case by making clear that an out-of-state Internet retailer’s virtual presence within a State is a sufficient ground for requiring the retailer to collect sales or use taxes owed by its in-state customers.”

Four senators — Heidi Heitkamp (D-N.D.), Lamar Alexander (R-Tenn.), Dick Durbin (D-Ill.) and Mike Enzi (R-Wyo.) — also filed a brief in support of South Dakota. Their brief specifically calls for the physical presence standard in the 1992 ruling to be overturned.

“Not only has the Quill rule cost the states millions in lost use tax revenue, but it has hurt their in-state business through the tax advantage that the Quill rule conferred on remote vendors who can charge a ‘tax free’ price for the same product for which local vendors must raise the price in order to collect the tax,” the senators said.

Other supporters of the South Dakota law include the National Governors Association, major retail groups and real estate groups. They say they are optimistic that the Supreme Court will side with them.

“We feel our argument is important, that there actually has been harm because of the Quill decision,” said Jennifer Platt, vice president of federal operations at the International Council of Shopping Centers.

But others want the Supreme Court to let the 1992 ruling stand. Wayfair’s deadline to file its brief is March 28, and friend-of-the-court briefs backing the company are due April 4.

House Judiciary Committee Chairman Bob Goodlatte (R-Va.) said in a statement earlier this year that the court should keep the physical-presence standard “so that businesses will continue to be regulated only by their own state and local legislatures and not those of their competitors.”

Andrew Moylan, executive vice president of the National Taxpayers Union Foundation, said that if the Quill ruling is overturned, it would be a step on the path toward states having unchecked power to taxing interstate commerce.

There would be “very serious consequences,” he said.

Steve DelBianco, CEO of the e-commerce business trade association NetChoice, expressed concerns about the Trump administration’s brief in support of South Dakota.

“It’s truly troubling that the administration wants the Supreme Court to support South Dakota’s attempt to reach across its borders to tax any business anywhere in the country,” he said in a statement.

The court case has renewed talk of legislative action in Congress.

Some lawmakers who want states to have more power to collect their sales taxes are pushing for Congress to pass legislation before the Supreme Court rules.

Reps. Kristi Noem (R-S.D.), Steve Womack (R-Ark.) and Tom Reed (R-N.Y.) are among those trying to get online sales tax legislation included in the omnibus spending bill that lawmakers are expected to pass this month. GOP sources said there have been discussions about the topic in Speaker Paul Ryan’s (R-Wis.) office in recent days, but no decisions have been made.

“This needs to be resolved as it is a basic fairness issue to allow brick-and-mortar stores to compete with online businesses,” Reed said. “That’s why I support this — it protects jobs on every Main Street — and the omnibus is an appropriate vehicle to get it to the finish line.”

Heitkamp, who represented North Dakota in the Quill case when she was the state’s tax commissioner, said Tuesday that it remains to be seen whether online sales tax legislation will be added to the omnibus.

“We’ll wait to see, but I feel confident that the court is going to reverse Quill,” she said.

The legislation that Noem, Womack and Reed are championing has bipartisan support, but it also has a fair amount of opposition from Republicans, including Goodlatte, as well as from Democrats from states without sales taxes. A coalition of conservative groups also sent a letter to lawmakers last week opposing the bill.

“This legislation is bad policy, bad politics and bad precedent,” they wrote.

Scott Wong contributed.