Supreme Court to hear case focused on online sales tax

Supreme Court to hear case focused on online sales tax

Some of the text from the landmark decision is inscribed on a wall at Avalara's Seattle HQ.

The U.S. Supreme Court will hear a case this week that will determine, to some degree, what you pay for things purchased online.

While online retailers are fighting sales tax collection because the lower total cost makes their products more appealing, states are mounting a relentless assault on the Quill decision.

The Supreme Court has addressed this issue over the years, eventually ruling that merchants with a physical presence in a state must collect that state's sales tax when selling to a resident of the state. Wayfair added this: It already collects taxes on 80 percent of its sales, a figure that will grow as it expands its warehouse network. However, NBC News notes that customers making online purchases from states that don't require sales tax collection are exempt from it. Tuesday's arguments may change this.

The Supremes are scheduled to discuss a tax dispute pitting South Dakota against Wayfair and codefendants Overstock.com and Newegg. This case could upend the long-standing ruling, instead installing a minimum sales threshold in a state as the defacto benchmark for collecting sales tax there. The law directly challenged the Quill decision, declaring an "urgent need for the Supreme Court of the United States to reconsider" the physical presence precedent. It affirmed a ruling made in 1967.

Sellers who want the court to keep the current rule say free or cheap software touted as a cure for the challenges of tax collection isn't accurate. The court reasoned that the volume of mail-order business was minor compared to in-store sales and that catalog companies would face too big a burden in having to figure out the correct sales tax, given widely different rates around the company. "State and local interests could also diverge where the pass-through of sales tax revenues is subject to state discretion". South Dakota's governor has said the state loses out on an estimated $50 million a year in sales tax that doesn't get collected by out-of-state sellers.

Should the court decide in favor of South Dakota, a number of scenarios are possible. "A retailer today can transact a significant amount of business in a state without ever being physically present in the state". They could also do something in between, granting the states more authority while imposing a number of restrictions.

At issue: a South Dakota law that essentially changes the physical presence threshold to a company's economic presence.

In a court filing supporting South Dakota, more than 40 states said the retroactivity concern is overblown.

"If Quill is overruled, the states will have no incentive to seek compromise federal legislation", according to the retailers' brief. The court reaffirmed that ruling in 1992. In addition, they said, the court can write a ruling that "applies prospectively only for all retailers and taxpayers".

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