Are the Days Numbered for the Online Sales Tax Loophole?
By Deborah White
Main Street retailers have long sought a level playing field for sales tax collection. Though sales tax is due on most purchases, regardless of whether it is made online or in a store, online-only retailers have avoided collecting the tax. Thanks to developing news out of South Dakota, that may soon change.Top Line:
On April 28, South Dakota began legal process to reevaluate SCOTUS holding in
Quill.Justice Kennedy signaled desire to reconsider
Quill.Case is well designed to move expeditiously, while protecting taxpayers during the process.Litigation is a direct result of Congressional inaction.On April 29, opponents of South Dakota law filed suit against the state.Late last week, the state of South Dakota filed a lawsuit seeking a determination that it may validly require out-of-state retailers to remit the state's sales tax on purchases made into the state. This action sets into motion what RILA believes is a sound pathway to reconsider the precedent set in U.S. Supreme Court's 1992 decision in
Quill, and level the sales tax playing field once and for all.
Justice Kennedy's Invitation to Reexamine
The action comes a year after U.S. Supreme Court Justice Anthony Kennedy recognized in his concurring opinion in
DMA v. Brohl that, "[t]he Internet has caused far-reaching systemic and structural changes in the economy" so that "a business may be present in a State in a meaningful way without that presence being physical in the traditional sense of the word." Noting the significant economic harms that were befalling state treasuries and local retailers, Justice Kennedy said that "it is unwise [for the US Supreme Court] to delay any longer a reconsideration of the Court's holding in
Quill" and asked the "legal system [to] find an appropriate case for this Court to reexamine
Quill." Last week, South Dakota did just that.
A Smart ApproachThe purpose of the lawsuit is clearly to give the US Supreme Court the opportunity to reconsider
Quill expeditiously. The South Dakota law, signed by the Governor in March, expressly authorizes the State to seek judicial resolution of the core legal issue through a declaratory judgment action and directs the circuit court to act "as expeditiously as possible." The legislation further asks the circuit court to assume that its consideration can be completed through procedural motions, rather than requiring a full trial. Appeals from the State circuit court's decision may only be made to the state Supreme Court, which is also directed to act "as expeditiously as possible."
South Dakota Lawsuit
The legislation also recognizes the "complicated position" in which it places taxpayers and builds in protections for them. For example, the declaratory judgment motion also triggers an injunction for the pendency of the litigation that prevents the State from enforcing the law's obligation until the core legal issues is finally adjudicated. Said another way, no penalties will be levied against businesses while the legal issue is considered by the courts. Further, the legislation prohibits the State from applying the tax obligation retroactively, which should assuage any concerns that the courts may have that a judicial decision invalidating
might require sellers to remit taxes that were owed by consumers on sales transactions but that the seller had not collected.
An Alternative to Congressional Inaction As you know, retailers have pressed Congress to solve this problem for more than a decade. After an overwhelming bipartisan vote in favor of the Marketplace Fairness Act in the Senate more than three years ago, retailers have worked tirelessly to support legislative efforts in the House of Representatives in hopes of a vote on similar legislation. To date, despite multiple bill introductions by supportive members of both parties, these efforts have not led to a markup of legislation in the House Judiciary Committee, let alone a vote by the full House. Retailers would prefer a legislative solution that guarantees small business protections and other simplifications over a legal challenge to
Quill. However, given continued inaction by Congress, it's clear that many states have given up hope for a timely legislative solution and are seeking a legal remedy. Absent real progress on a legislative solution, we fully support this effort.
Sample Coverage:Can South Dakota tax online sales? State presses to find out (Associated Press)South Dakota Sues for Online Sales Tax (Corporate Counsel)South Dakota, online retaileres go to war over sales tax (Politico Pro)
Remote Sellers File Suit Also
On Friday April 29, two trade associations representing remote sellers (Netchoice and the American Catalog Mailers Association) filed suit against South Dakota, seeking to have the same court declare the state's law unconstitutional. Given the requirement in the statute that the court give priority to the state's suit and the fact that such a decision would address the core question raised in the Netchoice suit, it is likely that the court will address the state's lawsuit first. Defendants in both lawsuits will respond within the next 30 days, so stay tuned!