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Online Sales Tax Fight Heads to Supreme Court

President Trump’s latest tweets about Amazon have put online sales taxes in the headlines recently, and the issue is poised to be in the news more in the coming days thanks to a case that’s landed before the U.S. Supreme Court.

This week a case pitting online sellers against brick-and-mortar stores will kick off. At issue is whether a 26-year-old ruling that prohibits states from requiring e-commerce businesses to collect sales taxes should stand. The decision in Quill v. North Dakota determined that only those e-tailers with a physical presence in a state could be made to collect taxes there.

That ruling has become more of a point of contention recently as e-commerce, which wasn’t a force in 1992, has sent shockwaves through the retail landscape. Several states have been agitating against the ruling, most notably South Dakota, which passed a law in 2016 requiring online stores to collect the state’s 4.5% sales tax if they did more than $100,000 in sales or completed at least 200 transactions there.

The result was a lawsuit from e-commerce pureplays Wayfair, Overstock and Newegg.

As outlined in the filing on behalf of the trio, the group contends that the reasoning behind the decision is still valid so it should stand, and the assertions made by South Dakota are baseless.

While Quill found that it would be too arduous for sellers to determine the correct sales tax on products sold across the country, South Dakota contends that today’s computing power would make it easy for sellers to make the necessary tabulations. However, the online retailers claim that it really would be no easier for sellers to stay current on the laws covering the 2,200 jurisdictions in the U.S. than it was in the past. As a result, they say Quill’s assertion that requiring these businesses to collect sales taxes would represent a burden large enough to harm the national economy, is still the case.

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Also, the filing on behalf of the e-tailers pulled data from a General Accounting Office report that it says shows the $33 billion South Dakota financial burden caused by Quill is actually closer to $8.5 to $13.4 billion.

Finally, Wayfair, Overstock and Newegg say while they’re among the biggest players, it’s actually smaller companies that will be hurt the most.

“Overruling Quill would cause direct harm to those businesses most in need of its protection. The GAO concluded that state sales tax collection would prove particularly burdensome for smaller and medium-sized retailers that lack internal systems for multi-state tax compliance,” according the filing, which cites GAO Report at 17. “The largest Internet retailers, meanwhile, already collect the tax at rates approaching traditional bricks-and-mortar sellers. The GAO found tax collection among the top 100 Internet retailers is between 87 and 96 percent.”

Amazon, for instance, now collects taxes in all states where it is required to do so on all direct sales. What could change, depending on the Court’s decision is if third-party sellers on a site like Amazon’s would have to begin following suit.

Despite these arguments, South Dakota believes physical presence is an outdated way to determine which retailers should collect sales taxes. And retail groups have been vocal in their support of measures that would supersede the Quill decision since they say it puts physical stores at a pricing disadvantage.

“Retailers have supported this case since the beginning, and believe it is the right case to correct the constitutional course set more than 50 years ago—well before the advent of e-commerce—that today gives online-only retailers an unfair commercial advantage at the expense of local retailers,”  RILA general counsel and Retail Litigation Center president Deborah White said in a release in January. 

Similarly, the National Retail Federation has said Quill is “antiquated” and in November, the group filed a friend-of-the-court brief to encourage the Supreme Court to hear the case. But the association also said a ruling from the high court isn’t enough.

“Congress should not sit on the sidelines as the Supreme Court considers this case. It’s time to pass legislation to settle this critical issue once and for all. Even if the court rules in favor of a modern sales tax policy, legislation will still be needed to spell out how that would work,” NRF president and CEO Matthew Shay said in statement.

The NRF has thrown its weight behind the Remote Transactions Parity Act, which would provide more guidance how sales tax would be collected. The group says a law like this would be necessary in order to standardize the process rather than leaving it up to the states to create their own interpretations of a Court ruling.

While it’s too soon to know which way the Justices may go, news reports have cited comments from Clarence Thomas, Anthony Kennedy and Neil Gorsuch that seem to indicate Quill could soon be a thing of the past.