The US Supreme Court has given states broad authority to require online and other remote sellers to collect sales taxes. And it has largely ended decades of uncertainty over the ability to states to collect taxes on online sales.
The 5-4 decision, in the case of South Dakota v. Wayfair Inc., explicitly reverses prior Court precedents that barred states from requiring retailers to collect tax unless the firms had a physical presence, such as a store or warehouse, in their jurisdiction.
The Court decided the most recent of those cases, Quill Corp. v North Dakota, in 1992. In that decision, the justices urged Congress to establish rules of the road for taxing remote sales. In the 26 years since, lawmakers have been unable to act. However, as online selling grew, states began finding their own ways to work around the Quill decision.
Now dozens do collect from remote sellers, sometimes stretching the law to argue that an online retailer establishes a physical presence in a state merely by leaving a cookie on a resident’s computer. The Tax Foundation estimates that 31 states already require non-resident remote sellers to collect tax.
Many sellers are already collecting
At the same time, many large online sellers have begun collecting tax from all customers who live in states that impose sales taxes, choosing a single model rather than collecting for buyers in some states and not in others. But there are exceptions. Amazon, for instance, collects on all its direct sales but not on behalf of third party sellers.
As a result, the practical effect of the Wayfair ruling will be modest for many consumers. And despite claims of some online sales tax critics, any additional revenues will result from states collecting a tax that most consumers already owe. That’s because states currently impose a “use tax” that requires consumers to pay tax directly if it is not collected by sellers. Few consumers comply and few states try to enforce the tax, but residents owe the money nonetheless.
How much tax revenue is being lost? That’s a matter of debate, but some estimates are as high as $30 billion annually.
Repudiation of Quill
The High Court decision was remarkable in its explicit repudiation of Quill. It called that decision “unsound and incorrect,” and “flawed on its own terms” and said it “creates rather than resolves market distortions.” In effect, the majority of justices said that the Court made a mistake in 1992 (and in an earlier case) and it was now going to fix that error.
The Court’s majority—including justices Kennedy, Thomas, Ginsburg, Alito, and Gorsuch—said that states should have broad leeway in imposing taxes without interference by federal courts. It also said that Quill’s physical presence rule gave “some online retailers an arbitrary advantage over their competitors who collect state sales taxes” such as brick and mortar businesses.
The court’s minority, including Chief Justice Roberts and justices Breyer, Sotomayor, and Kagan, agreed that the physical presence rule was wrong. But they insisted that the High Court’s precedents should be preserved and preferred to leave a resolution of the sales tax controversy to Congress.
Flipping the burden
In fact, the decision has not let Congress off the hook. While the Court gave states broad leeway to collect sales taxes, it left many questions unanswered. For instance, should tax be collected based on the location of the seller or the buyer? If the latter, should it be based on a billing address or a shipping address? Should small firms be exempt from the requirement to collect tax? If so, how should small be defined?
These questions could be answered by the states themselves, or though an already existing streamlined sales tax process. Or they could be resolved by Congress.
One thing for sure: The High Court’s decision today has flipped the political burden of addressing the remote sales tax issue. Until this morning, states were limited in their ability to collect sales taxes as long as Congress refused to address the issue. Now, the High Court has given states broad flexibility to enforce such collections—an authority that cannot be curbed unless Congress acts.
