It appears that Congress is about to miss its last real opportunity to address the online sales tax problem before the Supreme Court rules on the issue. To complain that Congress is failing to do its job seems almost routine these days, but in this matter the concern seems especially well-deserved.
After all, when the Supreme Court first tackled this issue—now 26 years ago—it practically begged Congress to write rules of the road for state taxation of remote sales. It was so long ago that the High Court mostly had in mind catalogue sales. The idea of a mass online marketplace was still the gleam in the eye of people like Amazon’s Jeff Bezos, who would not even start selling books over the web for another three years.
Remember, this is not about whether online buyers owe state sales or use taxes. They already do. The dispute is over whether states can require retailers to collect the tax at the time of sale.
Quill
In its 1992 ruling in Quill v. North Dakota, the High Court said states could only require retailers to collect sales tax if those businesses had a substantial physical presence—known in legalese as nexus—in their jurisdictions. But the Court, which called the legal issues surrounding nexus a “quagmire,” strongly urged Congress to resolve the many unanswered questions surrounding remote sales: “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.”
Congress, being Congress, responded by appointing a commission. That’s what lawmakers do when they don’t want to tackle a hard issue. Not surprisingly, the panel wrote a largely inconclusive report, though states followed up with their own effort to streamline their sales tax systems and open the door to widespread collection of online sale taxes. About half the states that impose sales taxes have joined that effort.
Congress did nothing
Still, Congress did nothing. Bills were introduced. A few hearings were held. But every federal legislative initiative languished. Most died in the House Judiciary Committee, chaired by Rep. Bob Goodlatte (R-VA) who is an implacable foe of online sales taxes.
But while Congress dithered, the world changed. By 2016, about $400 billion in goods and services, or nearly 12 percent of all retail sales, were purchased online. E-commerce giants such as Amazon, which initially opposed federal legislation, shifted gears as they recognized the benefits of a single national set of rules rather than separate requirements from each of the 45 sales tax states.
In an effort to deliver products faster, Amazon also began setting up local distribution centers around the country. Because this gave the firm an undeniable physical presence in many states, it also began collecting sales taxes in those jurisdictions, though not for transactions involving third-party sellers.
State work-arounds
In the absence of federal clarity, states began moving to require online sellers to collect tax. Joe Henchman at the Tax Foundation has written a nice brief describing the post-Quill history of state activity.
In 2008, New York began requiring retailers to collect tax if they compensated in-state websites for referrals (so-called click-throughs) and had $10,000 in annual sales to New York residents. New York presumed a seller had physical presence unless the firm could rebut the claim. Twenty-one states have followed with similar laws of their own.
In 2010, Colorado passed a law requiring online sellers to notify residents that they may owe sales or use tax on their purchases and to report any sales to Coloradans to the state revenue office. The state argued that such notice and reporting requirements did not violate Quill since they didn’t actually require sellers to collect tax. Nine states have enacted their own versions of the Colorado law.
Cookies and apps
Massachusetts has proposed requiring many online sellers to collect sales tax merely if they place “cookies” in resident’s web browsers or if Bay Staters download their apps. Ohio has adopted similar rules. And three states—Alabama, Mississippi, and Tennessee-- have simply ignored physical presence rules entirely, effectively requiring all but the smallest retailers who sell to their residents to collect the appropriate sales tax.
Now, with the door to state collection requirements wide open, the Supreme Court will revisit Quill in a case called South Dakota v. Wayfair Inc. It will hear oral arguments on April 17 and likely rule later this year. Most court observers believe the Court would not have taken the case if it did not intend to significantly revise its ruling in Quill and endorse what many states are already doing—requiring online and other remote sellers to collect sales tax from their residents.
Congress had one last opportunity to act before the Court. Rep, Kristi Noem (R-SD) tried to include her bill, the Remote Transactions Parity Act, in the big catch-all spending bill Congress is considering this week. But she reportedly failed to convince the House GOP leadership to greenlight her effort. With no other must-pass legislation on the docket this year, Noem’s bill, which would authorize states to require sellers to collect taxes if states simplify their sales tax systems, will likely die.
As a result, if the High Court reverses, even in part, its ruling in Quill, online sellers and customers will confront a cacophony of state rules—just what the Supreme Court hoped Congress would avoid—26 years ago.
