U.S. Supreme Court takes up state online sales tax dispute

The U.S. Supreme Court on Friday agreed to decide whether to let states require online retailers to collect billions of dollars in sales tax, taking up South Dakota’s dispute with three e-commerce companies.

South Dakota, appealing a lower court decision that favored Wayfair Inc, Overstock.com Inc and Newegg Inc, is asking the justices to overturn a 1992 Supreme Court ruling that companies with no physical presence in a state are not required to collect a state sales tax on purchases.

Some online retailers, including leading player Amazon.com Inc, already collect state sales tax but others do not.

The U.S. Government Accountability Office estimated in a November report that states and municipalities could gain between $8 billion and $13 billion in annual revenue if they could require online retailers to collect sales tax. Forty-five of the 50 states have a statewide sales tax.

Traditional retail industry groups argue that e-commerce businesses have an unfair advantage over brick-and-mortar competitors by being able to avoid collecting sales tax.

Various trade groups and 35 states had urged the high court to take up South Dakota’s appeal.
“Retail is a dynamic industry that’s rapidly transforming. Unfortunately, antiquated sales tax collection rules have resulted in an uneven playing field that’s making it harder for Main Street retailers to compete in today’s digital economy,” said Matthew Shay, president of the National Retail Federation trade group.

South Dakota has no state income tax and relies heavily on sales taxes to fill state coffers. The state enacted a law requiring out-of-state retailers to collect sales tax in 2016, knowing that the move would provoke a legal battle.

The state estimates that in the current fiscal year it would fail to collect around $50 million in revenue that it would be able to obtain if it could force online retailers to collect sales tax.

“These taxes fund education, public safety and the innumerable services that state governments provide,” said Deb Peters, a Republican South Dakota state senator involved in the issue.

‘UNREASONABLE TAX BURDENS’

Steve DelBianco, president of e-commerce trade association NetChoice, expressed disappointment about the court taking up the case.

“It’s not the decision we sought, but we’re glad the nation’s highest court will learn how new state laws are imposing unreasonable tax burdens on out-of-state businesses,” DelBianco said.

South Dakota’s law was passed partly in response to a concurring opinion written by Justice Anthony Kennedy in a unanimous 2015 Supreme Court ruling that allowed a challenge to a Colorado law encouraging retailers to collect the taxes to go forward.

Kennedy questioned the 1992 precedent, set in a case called Quill Corp v. North Dakota, and said the high court should reconsider it due to the explosive growth of online sales.

“Given these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the court’s holding in Quill,” Kennedy wrote.

South Dakota began the legal fight by filing suit against four retailers soon after the law was enacted: Wayfair, Overstock.com, Newegg Inc and Systemax Inc. Systemax agreed to collect the tax, while the other companies contested the state law.

In a September 2017 ruling, the South Dakota Supreme Court, citing the 1992 precedent, ruled against the state.

In its brief to the Supreme Court, the National Retail Federation said that software is now widely available that makes it easy for retailers to collect sales tax. Online marketplace eBay Inc, which exclusively sells products via third-party vendors, allows for sales tax to be calculated based on the address of the purchaser, for example.

The court is likely to decide the case by the end of June, when its current term ends.