The Supreme Court Opens The Door to Sales Tax Collections by Online Sellers

By :: December 3rd, 2013

Yesterday, by doing nothing, the U.S. Supreme Court took a giant step towards ending the decades-long dispute over whether states can require online retailers to collect sales taxes. In effect, the High Court ruled that, absent congressional action, states have broad authority to require Internet sellers to collect those levies just as their Main Street competitors must. And, in a delicious bit of online irony, the justices did it on Cyber Monday.

Twenty years ago, the High Court tentatively resolved the same dispute by placing a stiff burden on states that wanted to require mail order firms to collect those taxes. This time, the Court refused to even hear legal objections to New York State’s efforts to impose such a requirement on Internet sellers. As a result, it completely flipped the legal and political dynamics. Now, the burden will be on online sellers to prove that states cannot make them collect taxes.

But the justices had another audience yesterday: By refusing to hear the New York case they sent a strong signal to their across-the-street neighbor on Capitol Hill: Fix this. It is your job.

By allowing the New York law to stand, the High Court appeared to recognize that the commercial and technological landscape has changed in unimaginable ways since it last tackled this issue in 1992. Two decades ago, in a case called Quill v. North Dakota, the Court ruled that a state could not require mail order companies to collect those levies from their customers unless sellers had a “substantial” physical presence in its jurisdiction. Back in the day, the Court worried that it would be too onerous for an out-state seller to comply with a myriad of local tax rules.

How much as the world changed? Quill Corp was an office supply company that mailed 24 tons of catalogs and flyers into North Dakota each year. That state was trying to make the firm collect tax on products such as yellow legal pads.  In 1992, physical presence—or nexus in legalese—meant a factory,  a warehouse, or a sales office.

Today, Quill sells downloadable software and tech services. And anyone with a smartphone can download an electronic book from an Internet seller headquartered 3,000 miles away. The concept of physical presence seems almost quaint.At the same time, sophisticated software makes it relatively easy for sellers to calculate tax, even from thousands of different jurisdictions.  

And there is another way things have changed. Just a few years ago, cutting-edge online retailers such as Amazon.com led the charge against state laws that would require them to collect taxes.

Not anymore. Many online sellers long ago began collecting sales taxes without waiting for states to require it. Even, Amazon, long a champion of the status quo, changed its tune just as it began to revise its own business model.

No longer would it try to compete with big box stores by merely implying people could buy “tax-free” (though they never really could legally avoid tax). Now it is promoting same-day delivery of goods, and even promising drone-based shipments.But drone-ports (or whatever they are called) require old-style presence.

As a result, as more online sellers face state laws requiring them to collect, they'll increasingly want Congress to create a relatively simple, consistent set of rules. Main Street businesses have demanded equity for years. And states, even many headed by Republican governors, are hungry for sales tax revenues.

The Senate has figured it out. The roadblock now is the House, where some GOP lawmakers are holding up clarifying legislation because they see it as a tax increase.

It is not, of course. Buyers owe tax already on online purchases. Even if sellers don't collect it, consumers must pay what's called a use tax, though few do and states rarely enforce their own laws. Still, it is tough to argue that making people pay a tax they already owe is a tax increase.      

Back in 1992, the Supreme Court had this to say in its Quill opinion:

…The underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve. No matter how we evaluate the burdens that use taxes impose on interstate commerce, Congress remains free to disagree with our conclusions....Accordingly, Congress is now free to decide whether, when, and to what extent the States may burden interstate mail-order concerns with a duty to collect use taxes.

After yesterday’s decision, the equation has changed dramatically. Congress still has a responsibility to act. But this time, it will be online sellers, not states, who will suffer by its inaction.  

17Comments

  1. Tax Roundup, 12/4/2013: Justice Scalia doesn’t believe in the Tax Fairy. And sure, the IRS can run another tax credit! « Roth & Company, P.C  ::  9:32 am on December 4th, 2013:

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  2. Michael Bindner  ::  2:26 am on December 5th, 2013:

    I can smell the modest judiciary style of John Roberts in this. Hopefully this will start an arms race of states imposing taxes that will get even the most recalcitrant online retailer (or Republican) to support the Senate bill.

  3. Elliott Dubin  ::  12:45 pm on December 5th, 2013:

    The decision by the Supreme Court not to hear the New York State case does not overturn the Quill decision of 1992. The New York method can be considered a “work around” of Quill. A true overturn of Quill would have drastically lowered the bar for states to require remote sellers to collect and remit sales/use taxes. Instead, the Court passed the burden on to Congress and the president to establish uniform nexus standards that would require remote sellers to collect and remit sales/use taxes.

  4. Rich  ::  4:55 pm on December 5th, 2013:

    The NY court found that the NY law was consistent with Quill because “the legislature has attached significance to the physical presence of a resident website owner.” In other words it appears that the movement from Quill relates to “substantial,” not “physical,” presence.

    To me, no cert is a bad outcome because it opens the way to tiresome disputes about substantial vs insubstantial physical presence. By allowing congress room to evade Quill’s invitation to clarify sales tax rights, no cert prevents progress in either direction, toward plain brick & mortar/internet parity or toward a clear, reliable distinction between them.

    @ Michael Bindner, My untutored political intuition is that having the online retailers get congress to grant relief from awful state taxes could be a harder road to congressional action than having angry local merchants demand sales tax parity from their reps/senators (as now). Although “anti-tax” politics have contributed to congressional inaction after Quill, it’s hard to see “interference with your home state government’s constitutional rights” as something that elected officials will be enthusiastic about if Quill’s really gutted and twenty-some onerous rules bloom in states with a sales tax and a suitable political climate.

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  6. Five Tax Trends to Watch in 2014 | New World Staffing Inc.  ::  9:21 am on January 3rd, 2014:

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  7. 2014 Tax Trends to Keep an Eye on « The Joy of Tax Law  ::  3:15 pm on January 17th, 2014:

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  8. Tom McCaleb  ::  8:15 am on March 12th, 2014:

    It seems to me the states could long ago have resolved the problem on their own by changing their tax laws to place the legal incidence of the tax on businesses physically located in the state as a percent of all sales to final purchasers no matter where located. In most (perhaps all) states, the seller is merely the collector, and the legal incidence actually rests on the purchaser. Instead of Florida attempting to require Amazon to collect tax from Florida residents on their Amazon purchases, Washington State would collect tax on all Amazon sales regardless of the location of the purchaser. Similarly, Florida would collect tax from Florida-based businesses on all sales to purchasers no matter where located. This would be a true sales tax, not a “purchase” tax, and I’m not aware of anything that prevents the states from redefining their taxes in this way. Problem solved.

  9. On the Hill or Out the Pocket: Tax Reform and Some Bottom Lines | Collins Consulting Service  ::  8:28 am on March 13th, 2014:

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  10. MHJ  ::  12:12 pm on March 13th, 2014:

    That doesn’t get the tax revenue to the State where the customer is located, nor apply that other State’s (not to mention local jurisdictions’) rate. You would need a very complicated set of interstate agreements to do that, with each State tracking all the thousands of rates across the country and remitting the correct amounts to each taxing body. And that’s only the tip of the administrative iceberg.

    And, if each State just keeps what it collects, you’ll get a race to the bottom as States lower their sales tax rates on online businesses to attract such businesses to locate there, bringing jobs and other tax revenues (personal and corporate income tax, property taxes, and others).

    Your idea is administratively unworkable and creates all the wrong incentives.

  11. On the Hill or Out the Pocket: Tax Reform and Some Bottom Lines  ::  2:03 am on March 15th, 2014:

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  12. A Terrible Response to the Internet Sales Tax Mess – Forbes  ::  4:07 pm on March 18th, 2014:

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  13. Find your Attorneys and Lawyers » A Terrible Response to the Internet Sales Tax Mess  ::  7:39 pm on March 18th, 2014:

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  15. A Terrible Response to the Internet Tax Mess | Collins Consulting Service  ::  6:50 am on March 20th, 2014:

    […] sued by Amazon.com and Overstock.com…and won in state court. Last year, the U.S. Supreme Court refused to hear the case, effectively letting stand New York’s requirement that online sellers collect sales tax. And […]

  16. Five Tax Trends to Watch in 2014 – B2B CFO® Dallas / Fort Worth, TX  ::  10:35 am on March 24th, 2014:

    […] 2014 may be the year Congress finally addresses this issue. The U.S. Supreme Court’s December decision that let stand a New York law requiring online retailers to collect sales taxes collect has […]

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