By Amy Drumm, MRA Vice President, Government Affairs
Brick and mortar retailers across the country welcomed the Jan. 12 announcement that the U.S. Supreme Court will take up a case this spring regarding whether out-of-state online retailers should collect state sales taxes. This case has the potential to help struggling, Michigan-based brick and mortar retailers who are forced to collect the state’s six percent sales tax on every dollar of every purchase while out-of-state online retailers do not. It could also help fill budget holes in states around the country. A report from Congress’ Government Accountability Office estimates $13 billion worth of sales taxes go uncollected each year.
The case comes out of South Dakota, which passed a law in 2016 requiring out-of-state online sellers to collect the state’s 4.5 percent sales tax. The law was then challenged by Wayfair, Overstock.com and Newegg. These online retailers challenged the South Dakota law for violating the U.S. Constitution’s commerce clause, which only grants congress the authority to impose tax and regulatory burdens on interstate businesses.
The South Dakota case seeks to challenge the relevancy of two previous cases, a 1992 case Quill Corp v. North Dakota settled in 1992 and a1967 case National Bellas Hess v. Department of Revenue. In both cases the U.S. Supreme Court ruled that a mail order business (Bellas Hess) or internet seller (Quill) was not required to collect sales or use tax unless the seller had some physical presence in the state. However, in Quill, the court included a direct plea to Congress that it can and should address this issue. The hope is the court in its review of the case will find the previous Bellas Hess and Quill cases to be obsolete in the face of current technology.
26 years have passed since the court first ruled in Quill and Congress has still not addressed the collection of state sales and use taxes. States began challenging this physical presence standard in 2008 by passing “Main Street Fairness” legislation. MRA won approval of Main Street Fairness legislation in 2014 after several years of advocating for the change. Michigan’s legislation expanded the definition of physical presence to include new activities beyond a physical location or building. Michigan’s law has had an impact – Amazon and other sellers now collect sales tax on purchases made by Michigan residents. However, in order to capture all out-of-state sales activity, federal action is necessary.
State legislation like Michigan’s 2014 Main Street Fairness law has prompted Congress to consider addressing the issue, but Congress has not been able to decide how to handle it. It should be noted that Congress does not have much skin in the game. Sales and use taxes are collected by the states, not the federal government and could be perceived as tax increase by residents in the six states that don’t currently impose a sales tax.
While there is pending legislation in Congress, its inaction prompted the Supreme Court to offer to weigh in on the issue. In a 2015 ruling on a procedural matter, U.S. Supreme Court Justice Anthony Kennedy wrote in his opinion, “The legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess.”
Interestingly, the same congressmen who have not yet found federal legislation to move forward, weighed in on the South Dakota case, urging the court to leave the matter up to Congress. In an amicus brief from the chairmen of several committees with jurisdiction over the issue, they wrote, “The fact that Congress thus far has not enacted a federal solution to the problem of the collection of State use taxes on sales by remote vendors should not be seen by the Court as a reason to give up on Congress.” It seems the Supreme Court disagrees.
Michigan’s attorney general, Bill Schuette, signed on to an amicus brief with 33 other states urging the court to take up the case and soon. While we wait to see the outcome of the case, it is worth noting that even a favorable ruling will still likely require both federal and state legislation to implement.
