Supreme Court opens the door for online sales tax

The Supreme Court ruled that states have broad authority to require Internet sellers to collect sales taxes, just as their Main Street competitors must. And, in a delicious bit of online irony, the justices did it on Cyber Monday.

Yesterday, by doing nothing, the U.S. Supreme Court took a giant step towards ending the decades-long dispute over whether states can require online retailers to collect sales taxes. In effect, the High Court ruled that, absent congressional action, states have broad authority to require Internet sellers to collect those levies just as their Main Street competitors must. And, in a delicious bit of online irony, the justices did it on Cyber Monday.

Twenty years ago, the High Court tentatively resolved the same dispute by placing a stiff burden on states that wanted to require mail order firms to collect those taxes. This time, the Court refused to even hear legal objections to New York State’s efforts to impose such a requirement on Internet sellers. As a result, it completely flipped the legal and political dynamics. Now, the burden will be on online sellers to prove that states cannot make them collect taxes.

But the justices had another audience yesterday: By refusing to hear the New York case they sent a strong signal to their across-the-street neighbor on Capitol Hill: Fix this. It is your job.

By allowing the New York law to stand, the High Court appeared to recognize that the commercial and technological landscape has changed in unimaginable ways since it last tackled this issue in 1992. Two decades ago, in a case called Quill v. North Dakota, the Court ruled that a state could not require mail order companies to collect those levies from their customers unless sellers had a “substantial” physical presence in its jurisdiction. Back in the day, the Court worried that it would be too onerous for an out-state seller to comply with a myriad of local tax rules.

How much as the world changed? Quill Corp was an office supply company that mailed 24 tons of catalogs and flyers into North Dakota each year. That state was trying to make the firm collect tax on products such as yellow legal pads.  In 1992, physical presence—or nexus in legalese—meant a factory,  a warehouse, or a sales office.

Today, Quill sells downloadable software and tech services. And anyone with a smartphone can download an electronic book from an Internet seller headquartered 3,000 miles away. The concept of physical presence seems almost quaint.At the same time, sophisticated software makes it relatively easy for sellers to calculate tax, even from thousands of different jurisdictions.  

And there is another way things have changed. Just a few years ago, cutting-edge online retailers such as Amazon.com led the charge against state laws that would require them to collect taxes.

Not anymore. Many online sellers long ago began collecting sales taxes without waiting for states to require it. Even, Amazon, long a champion of the status quo, changed its tune just as it began to revise its own business model.

No longer would it try to compete with big box stores by merely implying people could buy “tax-free” (though they never really could legally avoid tax). Now it is promoting same-day delivery of goods, and even promising drone-based shipments.But drone-ports (or whatever they are called) require old-style presence.

As a result, as more online sellers face state laws requiring them to collect, they’ll increasingly want Congress to create a relatively simple, consistent set of rules. Main Street businesses have demanded equity for years. And states, even many headed by Republican governors, are hungry for sales tax revenues.

The Senate has figured it out. The roadblock now is the House, where some GOP lawmakers are holding up clarifying legislation because they see it as a tax increase.

It is not, of course. Buyers owe tax already on online purchases. Even if sellers don’t collect it, consumers must pay what’s called a use tax, though few do and states rarely enforce their own laws. Still, it is tough to argue that making people pay a tax they already owe is a tax increase.      

Back in 1992, the Supreme Court had this to say in its Quill opinion:

…The underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve. No matter how we evaluate the burdens that use taxes impose on interstate commerce, Congress remains free to disagree with our conclusions….Accordingly, Congress is now free to decide whether, when, and to what extent the States may burden interstate mail-order concerns with a duty to collect use taxes.

After yesterday’s decision, the equation has changed dramatically. Congress still has a responsibility to act. But this time, it will be online sellers, not states, who will suffer by its inaction.