The last time the Supreme Court (the Court) addressed the business presence criteria for sales tax purposes, Windows 3.1 had just been released, the World Wide Web was in its infancy, and mail-order catalogs were the main way purchases were made from distant sellers. Twenty-six years and billions of dollars of lost sales tax revenue later, the Court is set to reexamine the physical presence requirement it set down in the 1992 Quill case. Its decision, expected by late June, has the potential to completely change how sales and use taxes are collected.
The Court held in Quill that a retailer need not collect state sales taxes unless it has a physical presence in the state. As retail sales have shifted online, more and more buyers are able to purchase items from out-of-state sellers without paying any tax, resulting in states missing out on up to $34 billion annually in revenue. Consequently, many states have passed laws to circumvent Quill, and online retailers now face a cumbersome patchwork of sales tax tracking, collection, and reporting requirements.
South Dakota passed a law in 2016 requiring certain companies to collect sales tax on purchases made by South Dakota residents. Online retailers Wayfair, Overstock.com, and Newegg were sued by the state after refusing to register for sales tax licenses, and South Dakota v. Wayfair quickly made its way to the Supreme Court. South Dakota and 35 other states believe that the Quill decision is outdated and unfair, while the three retailers insist that Congress, not the courts, must have the final say.
The Court likely would not have taken the case unless it was reconsidering Quill. Justice Anthony Kennedy has said Quill was “questionable even when decided,” and is “now inflicting extreme harm and unfairness on the states.” Justice Neil Gorsuch said, as an appeals court judge, that Quill created “a sort of judicially sponsored tax shelter” for online sellers. But the physical presence issue is complex, and the Court in this case is really only considering whether South Dakota’s law is constitutional. Congress is once again invited to enact a nationwide policy, and a judgment for South Dakota may spur it to do so.
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