A case pending before the U.S. Supreme Court this spring may overturn 25 years of precedent and allow states to tax people selling goods and services on the internet (including those who sell on eBay, Amazon, Etsy and other web-based retail platforms) even if they don't have a physical location within the state.
The case — South Dakota v. Wayfair Inc. — deals with a 2016 South Dakota law requiring certain out-of-state vendors to register and pay sales tax in South Dakota if the following conditions are met:
—They have over $100,000 in gross sales to South Dakota residents in a calendar year.
—They engaged in over 200 separate transactions within South Dakota during the previous calendar year or year to date.
Since 2009, a number of states have passed similar laws (sometimes called Amazon-tax laws because they appear to target large-volume third-party sellers on Amazon) requiring the collection and payment of sales taxes if an out-of-state vendor has significant contacts with the state, typically a large volume of sales. So far, virtually all of these laws exempt small-business sellers who sell only occasionally to the state, although the rules vary from state to state.
Web sellers have always been required to collect and pay sales taxes in the states where they are physically located. They are also required to collect and pay sales taxes in other states if they have a physical presence — called "nexus" — in that state. For example, a partnership with one partner in State A and another in State B would require collection and payment of sales taxes in both States A and B. The same goes for an online seller in State A who hires a State B resident as an employee working out of his or her home in State B.
The courts have routinely denied states the right to tax out-of-state vendors who don't have a nexus (physical presence) in the state because of the "dormant commerce clause" of the U.S. Constitution, which prohibits states from passing laws that discriminate against out-of-state actors, or have the effect of favoring in-state economic interests over out-of-state interests. Laws that apply equally to in-state and out-of-state actors in similar situations do not violate the clause.
In 1992, the U.S. Supreme Court handed down a decision — Quill Corp. v. North Dakota — striking down a state law very similar to the South Dakota law on the grounds that it violated the clause. But note the date on that case. In 1992, the internet was just emerging as an electronic communications and commercial medium. Amazon and eBay, the two principal online retail platforms in the United States, were not incorporated until 1994. The Quill case involved a mail-order house that sold office supplies through mail-order catalogs.
Today, e-commerce is a multibillion-dollar industry that threatens to consign both brick-and-mortar and traditional mail-order retail operations to the dustbin of history. In the process, states have lost billions of dollars in sales-tax revenue. Why? Because most online transactions are interstate or international sales, which, under the Quill Corp. ruling, cannot be taxed.
Over the years, Congress has attempted to overrule the Quill case to no avail. In 2015, a U.S. Supreme Court judge hinted in a footnote that it was time for the court to reconsider Quill Corp. in light of these developments. South Dakota passed its law before the ink on that footnote had a chance to dry.
It's difficult to predict how the court will rule. Brick-and-mortar retailers almost certainly will make their views known to the court because they have a legitimate claim that the Quill Corp. ruling allows internet vendors to compete unfairly with them. After all, brick-and-mortar retailers such as Walmart must collect and pay sales tax each time a cash register rings up a sale, but if an internet vendor sells 100 percent of the same merchandise to out-of-state customers, it doesn't have to pay sales taxes anywhere.
A number of state governments are expected to weigh in on this case as well, due to the huge revenue losses they have suffered as a result of not being able to tax internet sales.
On the other side, organizations representing small-business interests such as the National Federation of Independent Business and the National Auctioneers Association are almost certain to file "friend of the court" briefs citing the damage a pro-tax ruling in Wayfair would wreak on small internet vendors who currently have no way to keep track of the 7,600 state and local governments in the United States that impose sales taxes. To see who is filing these briefs and what they are arguing, see www.scotusblog.com/case-files/cases/south-dakota-v-wayfair-inc.
As of today, neither eBay nor Amazon has weighed in on the Wayfair case, but they are almost certain to do so. EBay sellers should check eBay Main Street, eBay's government relations website, for updates on what they can do to let their voices be heard. Amazon does not provide a similar site, but any press releases it issues on sales-tax issues can be viewed at http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-news&nyo=0.
Cliff Ennico ([email protected]) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our webpage at www.creators.com.