A look at the Collection of Sales Taxes

Interesting column in Internet Retailer looking at the reaction of online retailers to the potential overturning of the SCOTUS 1992 ruling in Quill Corp. vs. North Dakota.  For those who are not familiar with the ruling, Quill Corp. vs. North Dakota was the Supreme Court ruling that said businesses without a physical presence in a state did not have to collect sales tax from customers who lived in that state, effectively preventing states from collecting sales tax on mail order and online purchases. The ruling was based on the Dormant Commerce Clause of the Constitution, which prevents states from interfering with interstate commerce unless specifically authorized by the United States Congress. Since Congress had not passed any laws dealing with the situation at the time, the court determined that Quill did not have a “substantial nexus” or connection to North Dakota and was thus exempted from collecting  and remitting sales or use tax to the state. However, the Court did explicitly state in its ruling that nothing prevented Congress from passing legislation to deal with the situation. Since, internet commerce was in its infancy at the time, with sales amounting to less than 1% of all retail sales, and the Congress has never met a situation it did not want to kick down the road until it became absolutely imperative to deal with it, Congress passed on developing any legislation to authorize states to collect sales tax from internet companies without some physical location in the state.

However in 2015, in his concurrence to the Court’s ruling on Direct Marketing Association vs. Brohl,  Justice Anthony Kennedy wrote about Quill’s “Tenuous nature” and the “serious continuing injustice faced by Colorado and many other States”, offering the states an opportunity to forcing “Kill Quill” suits by passing legislation compelling out of state vendors to collect and remit sales tax, forcing the vendors to bring lawsuits attempting to overturn the legislation. The states then expect these lawsuits to provide a legal vehicle to move the dispute back to the Supreme Court, revisiting and, the states hope, overturning the ruling. So far, the states’ plan has worked with argument of South Dakota v. Wayfair Inc. before the Court scheduled for this April .

Some of the comments from online only retailers in the column noted at the top really struck me, especially this one, in the light of the increased use of MAP in the gaming industry, by Deb Beresford, ecommerce manager at web-only sunglasses retailer X-wear.com:   “In the last two years, many of the sunglasses brands that we sell have changed their policies to require their retailers to maintain minimum advertised pricing. Because we can no longer discount most of these sunglasses, we lost huge revenue on the marketplaces where we list our products. The only reason I believe we capture any out of state customers is because they don’t have to pay sales tax. It’s very hard to find an edge in this market now without the courts taking away the one thing that gives any of us a fighting chance” and this one from Atinc  Sonmezer,  CEO of dancewear retailer MissbellyDance.com:  “ It will be very costly. I’m not sure how small businesses selling on Amazon nationwide will be able to handle it.”

Even Congress will probably move on this. I spoke with my House Representative this week and he said online sales tax reform was the number one topic mayors in the cities in his district wanted to discuss. We will see what happens but I expect to see some legislation dealing with the situation in the next year or three.