Will 2018 Be the Year of Reckoning for Online Tax Collection?

The United States Supreme Court recently decided to revisit Quill Corp. v. North Dakota, a 1992 ruling that basically allowed states to collect taxes on online sales only from sellers that had a physical presence within their boundaries.

Brick-and-mortar retailers for years have argued that the ruling puts them at a competitive disadvantage.

At least 35 states have been urging a reconsideration of the Quill ruling on the grounds that they’re losing out on collecting taxes, and last year’s record online sales figures on Black Friday and Cyber Monday have lent strength to their calls.

States and local governments could have gained between US$8 billion and $13 billion in 2017 if they had the authority to collect sales tax from all remote sellers, according to a United States Government Accountability Office report to Congress last fall.

The Supreme Court probably will hear arguments in April, and a ruling is expected by late June.

Why SCOTUS Will Revisit Quill

The Supreme Court’s decision to revisit Quill grew out of a law South Dakota passed in 2017 to collect sales taxes from out-of-state vendors with large sales in the state.

It demanded that Wayfair, Newegg, Overstock and Systemax collect taxes. Systemax complied, but the other three refused.

South Dakota took them to court but lost. It then appealed to the U.S. Supreme Court, based on the following:

• Statements made by Associate Justice Anthony Kennedy in Direct Marketing Ass’n v. Brohl, which the U.S. Supreme Court had decided in favor of Colorado;
• The claim that states, local brick-and-mortar stores, and interstate commerce were being harmed; and
• The argument that the physical presence requirement was flawed, in part because the nature of the Internet makes a state’s economic nexus much broader than in 1992.

In the Colorado case, Associate Justice Kennedy said that “the Quill majority acknowledged the prospect that its conclusion was wrong when the case was decided,” and that “there is a powerful case to be made that a retailer doing extensive business within a state has sufficiently ‘substantial nexus’ to justify some minor tax-collection duty, even if that business is done through mail or the Internet.”

Other factors, such as the composition of the U.S. Supreme Court and the lack of congressional action on the issue also came into play in the decision to hear South Dakota’s appeal.

Support for the Appeal

The Quill ruling “is outdated and doesn’t reflect the realities of today’s digital economy, including the emergence of new technology that helps businesses comply with varying state and local sales tax laws,” said Bethany Aronhalt, spokesperson for the National Retail Federation.

Retailers on Main Street are most in need of a more level playing field, she told the E-Commerce Times. Local businesses, in particular, “are struggling to remain competitive under the current broken system where online merchants have an advantage.”

Concerns Over a Pro-Tax Ruling

However, the fairness issue might be a two-edged sword.

If the Supreme Court rules in favor of tax collection, “it will be up to Congress to pass the laws and rules governing the practice,” noted Georg Richter, CEO ofOceanX.

Those laws and regulations “will be dictated more by lobbying and protecting the larger players on either side in each state,” he told the E-Commerce Times.

That would not promote entrepreneurship or small business, Richter said, and “I hope that any threshold they set is high enough for each state that a retailer would have millions of dollars [in sales] for the tax to kick in.”

Also, online sales, which the U.S. Census bureau estimated to be US$115 billion in Q3, 2017, accounted for only 9 percent of total retail sales.

The Impact on SMB Etailers

SMB etailers and smaller omnichannel retailers experiencing fast growth in their designated sectors would be affected the most if Quill were overturned, said OceanX’s Richter.

“You could argue that Amazon would not be where it is today if not for the benefit of years with no sales tax requirements that enabled them to convert many consumers into loyal brand customers,” he noted.

Overturning Quill “would risk allowing states to reach outside their borders,” observed Ryan Radia, research fellow and regulatory counsel at the Competitive Enterprise Institute.

That outcome “would reduce healthy tax competition among the states; dramatically increase the complexity of online retailers’ compliance with state tax laws; and result in a significant de facto tax increase for the millions of Americans who shop on the Internet,” he told the E-Commerce Times.

“Implementing the [sales tax calculation] software could be pricey, but equally important is the fact that it could impact the customer experience by increasing the purchase processing time,” noted Darren Taylor, CMO of Morsco.

That “may adversely affect customer adoption,” he told the E-Commerce Times.

Admin Problems

It’s not having to pay sales taxes that will cost SMB e-tailers business or revenues, OceanX’s Richter contended — it’s the administrative overhead involved.

“Sales tax is not as big of a purchase consideration as it used to be,” Richter said. “Technology can make the charging of sales tax fairly simple.”

The biggest impact will be in “the time, resources and technology needed to calculate and collect these taxes and, more importantly, to file sales tax in each state once you hit that state’s threshold,” Richter remarked. “Imagine having to file and pay your income taxes in all 50 states multiple times a year.”