The tax advantage currently enjoyed by many online retailers may soon be coming to an end.
A ruling today by the South Dakota Supreme Court increases the likelihood that the United States Supreme Court will have the opportunity to revisit
Quill Corp v. North Dakota, a 1992 decision that forbade states from requiring retailers without a physical presence to collect sales tax.
The decision, which pre-dated modern e-commerce, created a loophole for online retailers to exploit at the expense of brick and mortar retailers. Overturning Quill would close the harmful loophole and treat all businesses equally, whether they are online or on Main Street.
In the 25 years since the original decision, online commerce has exploded. Retailers, cities and states across the country have aggressively pursued solutions to end the distinct competitive advantage given to growing e-commerce giants over brick and mortar stores. But a nationwide solution has been elusive, and despite more than a quarter century of debate, Congress has yet to solve the problem.
The twin impact of fewer brick and mortar storefronts and lost sales tax revenue has drained state and local coffers of billions in revenue every year. As a result, many states and local governments have had to raise other taxes to make up for the special tax treatment currently afforded many online transactions.
Behind the Decision
Today's decision from the South Dakota Supreme Court stems from a statute passed in 2016 by the
South Dakota Legislature designed to challenge Quill directly. The law, passed overwhelmingly by the Legislature and signed by Governor Dennis Daugaard, requires out-of-state retailers to collect and remit sales tax if they transact more than $100,000 of business in the state or more than 200 sales.
The law was signed roughly one 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."
The state high court here did the only thing that it could do: recognize that Quill is the law of the land and defer to the U.S. Supreme Court to reconsider its precedent.
The decision sets up the state's ability to bring the decision quickly to the U.S. Supreme Court, with a ruling expected before the end of its term in June 2018.
The opportunity for the Supreme Court to revisit the Quill decision is an opportunity to level the playing field across the retail industry, restore free market competition, and return to the basic principles of federalism that allow states to handle issues of local taxation.
For more on the issue and next steps in the case, see the below article published today in
South Dakota's Argus Leader.
|South Dakota tax law headed to Supreme Court|
Jonathan Ellis and Dana Ferguson,
Argus Leader Published 9:00 a.m. CT Sept. 14, 2017
The South Dakota Supreme Court has ruled that the state cannot force out-of-state retailers to collect sales tax, setting up a possible appeal to the U.S. Supreme Court that will have national implications.
The court issued its ruling Thursday morning, just two weeks after hearing the case brought by Internet retailers Wayfair Inc., Overstock and Newegg.
Lawmakers in 2016 passed a bill requiring Internet companies with more than $100,000 in annual sales or 200 transactions to remit sales taxes to the state. The law directly conflicted with a 1992 U.S. Supreme Court ruling, Quill v. North Dakota, that held retailers don't have to collect sales taxes in states where they don't have a physical presence.
South Dakota and other states have argued that Internet sales and software changes have revolutionized the retail system, making it easier for retailers to collect sales taxes and imperative for states that rely on those revenues to provide services. South Dakota is one of a handful of states without an income tax and it relies heavily on sales tax. State officials estimate that they lose tens of millions each year to out-of-state Internet sales.
Two justices on the U.S. Supreme Court have signaled their willingness to reconsider the Quill case. The South Dakota Supreme Court decision will give them that opportunity.
Attorney General Marty Jackley on Thursday said he was pleased with the court's decision and had begun reaching out to a bipartisan group of attorneys general to bolster the state's case to the U.S. Supreme Court.
"This was a very good decision and a very important decision in many respects," Jackley said.
The case has been followed across the country. Brick-and-mortar retailers have argued that they are at a disadvantage because they are required to charge sales taxes when their Internet competitors don't. If the Supreme Court overturns Quill, that loophole will be closed, they argue.
"The artificial price advantage created by the United States Supreme Court in Quill has done significant damage to thousands of brick and mortar retailers, and meant billions in lost revenue for state and local governments," said Deborah White, president of the retail litigation center for the Retail Industry Leaders Association. "By revisiting Quill, the Court can restore free market competition and return to the basic principles of federalism that allow states to handle issues of local taxation."
The South Dakota Supreme Court ruling, written by Justice Glen Severson, acknowledged the state's argument, but admitted that it was bound by U.S. Supreme Court precedent.
"However persuasive the State's arguments on the merits of revisiting the issue, Quill has not been overruled," Severson wrote. "Quill remains the controlling precedent on the issue of Commerce Clause limitations on interstate collection of sales and use taxes. We are mindful of the Supreme Court's directive to follow its precedent when it 'has direct application in a case' and to leave to that Court 'the prerogative of overruling its own decisions.'"