On Tuesday, a case to come before the Supreme Court could result in many internet retailers being forced to collect state taxes on the wares they sell even if they do not have a physical presence in the state, like a store or a warehouse.
In the case, titled South Dakota v. Wayfair, states are requesting the court overturn its earlier decision in 1992’s Quill Corporation vs. North Dakota, in which the court overruled the North Dakota Supreme Court’s decision that ruled that the Quill Corporation, an out-of-state mail-order office equipment retailer, had to collect a North Dakota use tax on Quill merchandise to be used within the state. The U.S. Supreme Court ruled that the use tax was unconstitutional because it interfered with interstate commerce, thus violating the Commerce Clause. The Court reversed the North Dakota Supreme Court’s decision by ruling in favor of the Quill Corporation.
Deborah White, general counsel of the Retail Litigation Center, said that the 1992 ruling should be overruled, arguing, “That rule doesn’t make sense anymore in today’s world of e-commerce. A retailer today can transact a significant amount of business in a state without ever being physically present in the state.”
If the states win the case, it would hurt retailers like Overstock.com Inc., Wayfair Inc., Newegg Inc., EBay Inc., Etsy Inc. as well as others. Amazon.com Inc. will also be hurt; as Bloomberg notes: “The company now charges consumers in every state that imposes a sales tax, but only when selling products that come from its own inventory. About half of Amazon’s sales involve goods owned by third-party merchants, many of which don’t collect tax.” Additionally, state and local governments could reap an extra $8 billion to $23 billion a year.
Overstock board member Jonathan Johnson pointed out the problems for companies like his, asserting, “When you come to Overstock, I’ve got to know 12,000-plus tax jurisdictions. And the more types of products I sell, the more difficult it is to map to the software that’s out there.”
The case before the court involves Wayfair, Overstock and Newegg, which South Dakota is suing for not charging taxes to consumers in the state. A 2016 law of the state’s which was meant to overturn the 1992 U.S. Supreme Court ruling requires retailers with over $100,000 in annual sales in the state to pay a 4.5% tax on purchases.
Internet retailers are worried about states retroactive punishment; Andy Pincus, a Washington lawyer who filed a brief on behalf of EBay and a group of small businesses, said, “I think you’re going to see a flood not only of demands for ongoing tax collection but retroactive audits.” But opponents counter that most states have safeguards to prevent retroactive application, or require advance notice.