Supreme Court Opens Up States' Ability to Collect Online Sales Taxes, Overturning Precedent

The high court's Quill precedent “puts both local businesses and many interstate businesses with physical presence at a competitive disadvantage relative to remote sellers,” Kennedy wrote in the majority opinion. “Remote sellers can avoid the regulatory burdens of tax collection and can offer de facto lower prices caused by the widespread failure of consumers to pay the tax on their own.” Wayfair's “advertising seeks to create an image of beautiful, peaceful homes, but it also says that ‘one of the best things about buying through Wayfair is that we do not have to charge sales tax,’” he said. “What Wayfair ignores in its subtle offer to assist in tax evasion is that creating a dream home assumes solvent state and local governments.”

E-commerce retail sales in 2017 “were estimated at $453.5 billion,” Kennedy said. “Combined with traditional remote sellers, the total exceeds half a trillion dollars,” a far cry from the estimated $180 million in mail-order sales in 1992. He noted some online sales transactions may be too small to require paying out-of-state sales taxes and didn't decide whether states can seek to charge back sales taxes on online sales: “These issues are not before the court in the instant case; but their potential to arise in some later case cannot justify retaining this artificial, anachronistic rule that deprives states of vast revenues from major businesses.”

Roberts agreed with Kennedy the court “wrongly decided” Quill but saw no compelling reason to rule for South Dakota and overturn the precedent. “E-commerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical-presence rule,” Roberts said. “Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress.” The new ruling means small businesses will have trouble complying with the wide range of state and local tax laws, he said. “People starting a business selling their embroidered pillowcases or carved decoys can offer their wares throughout the country -- but probably not if they have to figure out the tax due on every sale.”

Congress' Role

“There could be a role” for Congress to play on online sales tax legislation post-Wayfair, “but states have the right to do something” as well, said Sen. Mike Enzi, R-Wyo., a lead sponsor of the Marketplace Fairness Act (S-976). “There's already” efforts like the streamlined sales tax coalition aimed at simplifying the tax landscape. States that have already streamlined their sales taxes should now “recruit other states to join them,” Enzi told reporters. “It's a state issue” and “now there's an element of fairness.”

Sen. Orrin Hatch, R-Utah, told reporters he would “naturally be interested” in talking with Enzi, Sen. Lamar Alexander, R-Tenn., and other lawmakers who filed online sales tax legislation to see how they can move forward. “That's a very complex set of issues," which will require a close review of the language in Wayfair, he said.

A trio of House lawmakers who have taken an interest in online sales tax issues raised concerns about Wayfair's effects. The high court's reversal of Quill's physical presence principle “is a nightmare for American businesses and small online sellers,” said House Judiciary Committee Chairman Bob Goodlatte, R-Va., and Reps. Anna Eshoo, D-Calif., and Jim Sensenbrenner, R-Wis. “The physical presence rule the Court overturned today preserved the political accountability that is essential to deter complex compliance burdens for small businesses. Today’s decision will stifle online commerce, close businesses, and ultimately harm consumers.”

Congress “is the appropriate institution to resolve these policy questions, not the Supreme Court,” the lawmakers said. Goodlatte has been working on his draft Online Sales Simplification Act (OSSA) but had trouble getting a consensus agreement on the legislation. Sensenbrenner refiled the No Regulation Without Representation Act (HR-2887) last year. The National Conference of State Legislatures and the Retail Industry Leaders Association praised the ruling. The American Legislative Exchange Council, the Computer & Communications Industry Association and eBay were among the entities that lamented the decision.

Congress will likely need to “go back to the drawing board” on online sales tax legislation after Wayfair, said Information Technology and Innovation Foundation Vice President Daniel Castro in an interview. The high court's ruling “changes the debate quite a bit and it changes what Congress needs to do as well.” Retailers that have been fighting to overturn Quill “are sitting in a strong position” after the ruling, “so they might be less willing to compromise on some points of contention” that previously led them to accept a compromise via earlier legislation, Castro said.

NetChoice CEO Steve DelBianco and Americans for Tax Reform Federal Affairs Manager Katie McAuliffe separately told us the emphasis should be on Congress enacting legislation to reinstate the physical presence principle. “For many businesses, it means mayhem,” McAuliffe said: “We need Congress to do something” so state governments “don't abuse their power.” The ruling “blows away 60 years” of precedent, so Congress needs to rein in the “chaos that's going to be caused,” DelBianco said. He favored Goodlatte's OSSA draft but noted NetChoice also is working with its members on additional model legislation for lawmakers to consider. McAuliffe said she favors Sensenbrenner's HR-2887.