Audit, Compliance and Risk Blog

New Supreme Court Ruling Will Be Taxing to E-Commerce

Posted by Eric Robinson on Thu, Sep 13, 2018

Lap top credit cardThe old maxim states that the only two things that cannot be avoided in life are death and taxes. While there still does not seem to be any way to escape our ultimate fate, until recently there was one way to legally avoid certain taxes.

This only applied to sales taxes, and only when a customer in a state that generally charges such taxes purchased something through a catalog or online from a company that did not have any facilities in that state. The U.S. Supreme Court created this exemption in 1992, when it held in Quill Corp. v. North Dakota that the Commerce Clause of the federal Constitution barred the application of state and local sales taxes to sales of goods or services via mail order unless the seller had a substantial presence—such as physical stores or warehouses—located in the taxing state.

The Commerce Clause states that Congress has the power: “to regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.” When this clause declares that Congress may regulate foreign and interstate commerce, it also implies that individual states may not do so; a position that the Supreme Court has taken since 1851.

Technically, while the Quill ruling let customers in such situations off the hook for sales taxes, every state that imposes sales taxes also imposes “use taxes” on goods and services purchased by state residents from out-of-state sellers. However, the sellers could not be required to collect the taxes, placing the burden of paying these taxes on the customers, who regularly ignored this requirement.

As online commerce emerged, the disparity over sales taxes was justified as a means of encouraging this new business model. But as e-commerce grew, traditional retailers complained that the online sale tax exemption put them at a competitive disadvantage. States with sales taxes also complained about the lost revenue.

South Dakota adopted a law applying a requirement to collect sales tax to sellers that had no physical presence in the state but delivered more than $100,000 in goods or services into the state or had 200 or more separate sales transactions with customers in the state. The state then sought payment from several online retailers, and sued those who refused.

The ultimate goal was to get the Quill decision overturned. And in June 2018, the Supreme Court did so, upholding the ability of states to impose sales tax collection responsibilities on companies without physical facilities in the state but which sell goods and services within the state. In doing so, the majority reversed its earlier decisions to the contrary.

The majority opinion, written by Associate Justice Anthony Kennedy, observed that while customers are legally required to pay use taxes, collection of such taxes is impractical. The opinion then reviewed the Court’s early decisions regarding the states’ power to enact regulations effecting interstate commerce, concluding with the observation that such regulation was permitted as long as the regulation did not discriminate or place undue burdens on products from other states. This principle also extended to taxes, but in National Bellas Hess, Inc. v. Department of Revenue of State of Ill. (1967) and Quill, the Court held that states could not compel sellers to collect sales tax unless the seller had a physical presence in the state. In Quill, the Court added that Congress was free to legislate another solution.

In South Dakota v. Wayfair, Inc., however, the majority held that: “Each year, [the physical presence rule] becomes further removed from economic reality and results in significant revenue losses to the States,” and that: “the rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause.”

Justices Clarence Thomas and Neil Gorsuch each filed their own concurring opinions. Chief Justice John Roberts wrote a dissenting opinion for himself and justices Stephen Breyer, Sonya Sotomayor, and Elana Kagan, saying that while Hess and Quill were indeed likely wrongly decided, the prohibition on sales taxes on outside sellers had allowed e-commerce to flourish.

The Supreme Court’s reversal of Quill has important effects for online commerce. The decision is likely to lead states with sales taxes to seek to force out-of-state sellers to collect such taxes from buyers within the state, placing the burden on non-local sellers to decipher states’ various and often complex sales tax regimes. It also may lead Congress to act to create a simplified and streamlined system, or such a system may emerge from the retail industry itself. Several states have already joined the Streamlined Sales Tax Governing Board, an organization that is establishing simplified procedures for interstate sales tax collection, to address the issue.

So the old maxim about death and taxes reasserts itself. After the Supreme Court’s decision in Wayfair, there really is no way to avoid either of them.

This column is for educational purposes only; it does not constitute legal advice.

Specialty Technical Publishers (STP) provides a variety of single-law and multi-law services, intended to facilitate clients’ understanding of and compliance with requirements. These include:

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Tags: Business & Legal, Accounting & Tax, Internet