States Get a Big Win in Sales Tax Case
By Scott Mackey, Managing Partner, Leonine Public Affairs LLP
Today the Supreme Court of the United States handed states a victory they had been seeking – with no success – for over 25 years. The divided court ruled in South Dakota v. Wayfair that states can require retailers to collect the sales tax even if the seller lacks physical presence (or “nexus”) in the purchaser’s state. This ruling means that on-line shoppers will no longer be able to avoid paying the sales tax – potentially generating billions in additional revenues for state and local governments.
The long road to overturning the 1992 Quill v. South Dakota ruling began back in the mid-1990s, when states tried to convince Congress to pass legislation to overturn it. At that time, with no Internet marketplace, revenue losses from catalog sales were relatively small. Yet members of Congress were still unwilling to vote to impose a tax burden on their constituents, especially since the federal government would not get any of the revenue resulting from passage of federal legislation.
In the early-2000s, seeing the potential for growth in on-line commerce, states banded together to create the “Streamlined Sales Tax Project.” This multi-state effort was intended to simplify and standardize sales taxes to make compliance easier for multistate sellers. The effort had two additional goals: 1) to convince sellers to voluntarily collect sales taxes in participating states; and 2) to use technology and simplification measures to eliminate the “undue burden on interstate commerce” and convince Congress to overturn the Quill decision.
The Streamlined Sales Tax Project began with a dozen or so states and gradually expanded to the 24 states that are members today. While the project did not simplify and standardize sales taxes in the states as much as some multistate businesses would like, it spawned a robust marketplace of technology companies that built “soup to nuts” sales tax compliance systems that allow remote sellers to essentially outsource sales tax compliance. These “Certified Service Providers” even accept liability for errors in collecting and remitting sales tax, which significantly reduces the risk of sales tax compliance for sellers.
However, this effort at simplification did not convince Congress to pass legislation to overturn the Quill decision as the states had hoped. After repeated failures in Congress, the National Conference of State Legislatures (NCSL) in 2016 suggested that states pursue an aggressive effort to challenge the Quill decision in the US Supreme Court. Dozens of states passed legislation to expand nexus requirements, require companies to report their sales to state residents to the Department of Revenue, or both. This effort by the states to pass the so-called “kill Quill” bills was also intended to send the message to retailers that failure to work with the states on a Congressional solution could lead to multiple and conflicting state laws and regulations – and ultimately a more expensive and burdensome system. However, Congress remained deadlocked and the House failed to advance any legislative solution.
In the meantime, South Dakota moved forward aggressively, passing legislation that was carefully calibrated to avoid the pitfalls that could allow opponents to claim that collection of sales taxes placed an undue burden on interstate commerce. The South Dakota legislation included exceptions for small businesses and ensured that the tax could not be imposed retroactively. In addition, the South Dakota legislation included an expedited review process intended to get the case before the US Supreme Court as quickly as possible.
The jury is still out on exactly what the Wayfair decision will mean for states that are not members of the Streamlined Sales Tax Project, especially those that have not included the simplification, protection from retroactivity, and small seller exceptions that were key elements of the South Dakota law. The Supreme Court majority opinion suggested that states lacking these provisions may not be able to avail themselves of the benefits of the Wayfair decision. Another key question in whether “marketplace facilitators” – companies like eBay that create a platform to connect buyers and sellers but do not actually sell products to consumers – will be required to collect and remit taxes on behalf of sellers that use their platforms.
What is clear, however, is that those states with sales tax laws that include the key elements of South Dakota’s model will begin to see additional tax revenues in the new fiscal year that begins on July 1. It is also likely that states that have not passed legislation like South Dakota’s model will be looking carefully at making changes in their sales taxes next session, or perhaps even sooner in special sessions.
It is also possible that additional revenues from the Wayfair decision may also allow states to fix longstanding inequities in their sales tax systems, such as disparities in tax rates on services like telecommunications or sales tax exemptions for business-to-business purchases.
As the former Chief Economist at NCSL, I know that the organization has expended an extraordinary amount of time and effort over the last 20 years to get Quill overturned. The many state legislators – past and present – who have worked so hard for this decision over the last 20 years are celebrating this important decision.