Supreme Court Revisits Online Sales Tax Decision

Published March 6, 2018

Whether states can require out-of-state businesses to collect and remit sales taxes to the government on purchases made by in-state consumers will be determined by the U.S. Supreme Court in its current session.

Oral arguments in South Dakota v. Wayfair, Inc. are scheduled to begin on April 17.

In the 1992 case Quill v. North Dakota, the Court established the “nexus” standard for business taxation. Under that standard, a business need not remit sales taxes unless it maintains a physical location, or nexus, in a taxing jurisdiction. Consumers are supposed to pay the tax directly to governments, but compliance is low.

Lawyers representing the state of South Dakota are asking the court to overturn the Quill decision. 

Says Quill Is Fair

Bruce Edward Walker, a policy advisor for The Heartland Institute, which publishes Budget & Tax News, says he thinks Quill created a fair standard for interstate commerce over the internet.

“According to Quill and its interpretation of the Commerce Clause, only companies with a physical presence, or nexus, in a state are required to collect sales taxes in those states,” Walker said. “I can certainly appreciate that brick-and-mortar businesses might consider the playing field uneven, when it comes to the perceived advantage of some Internet businesses undercutting them by not charging sales taxes, but I also think the Quill decision was rightly decided. It [the Court] correctly applied the Commerce Clause of the U.S. Constitution.”

Walker says out-of-state taxation would disadvantage smaller businesses that rely on internet sales.

 “States are salivating over any revenue stream they can derive from any source,” Walker said. “From my perspective, this would be bad for smaller businesses. It could be deployed as a barrier to entry for startups.”

Bigger Plans Ahead?

Katie McAuliffe, a federal affairs manager at ‎Americans for Tax Reform, says the Wayfair case is a gateway to allowing governments to tax out-of-state business and employee income.

“I don’t think this is about sales taxes,” McAuliffe said. “There’s hardly any money in sales taxes. The goal is to set a precedent so that states like California, Illinois, and New York can go after business and personal income in other states. You’re really dealing with taxation without representation and regulation without representation on a massive scale. It’s a slippery slope,”

McAuliffe says state elected officials pushing for a reversal of Quill are trying to impose taxes and regulations on people who cannot vote in their state and hence have no say in the matter.

“It’s regulation without representation,” McAuliffe said. “That’s a serious problem. They’re really just trying to tax people that are outside of their state’s borders. When you have those regulations and regulatory burdens and the tax-collecting responsibility on businesses and people who can’t vote for you, then they really have no voice.”