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South Dakota Asks Supreme Court to Consider Online Sales Tax
For years, local authorities have tangled with online retailers over sales tax collection within communities. But this fall, a new development in a blockbuster Supreme Court case could force the issue into the national spotlight.
In Quill Corp. v. North Dakota (1992), the Supreme Court held that states cannot require retailers with no in-state physical presence to collect sales tax. Now, the state of South Dakota has filed a petition in South Dakota v. Wayfair asking the U.S. Supreme Court to hear a challenge to its law requiring out-of-state retailers to collect sales tax.
In March 2015, Justice Kennedy wrote a concurring opinion, stating that the “legal system should find an appropriate case for this court to reexamine Quill.” Justice Kennedy criticized Quill in Direct Marketing Association v. Brohl for many of the same reasons the State and Local Legal Center stated in its amicus brief. Specifically, internet sales have risen astronomically since 1992 — and states and local governments are unable to collect most taxes due on sales from out-of-state vendors.
Following the Kennedy opinion, a number of state legislatures passed legislation requiring remote vendors to collect sales tax. South Dakota’s law is the first to be ready for review by the U.S. Supreme Court. In September, the South Dakota Supreme Court ruled that the South Dakota law is unconstitutional because it clearly violates Quill and that it is up to the U.S. Supreme Court to overrule it.
Ruling in South Dakota’s favor will require the U.S. Supreme Court to take the unusual step of overruling precedent. In its petition, South Dakota explains why the court should agree to hear this case and rule in its favor: Quill clearly needs to go.
When the court considers overruling its precedent, it looks to whether the existing rule: (1) is constitutional or statutory; (2) has engendered reliance interests; (3) has been undermined by changed circumstances; (4) has been consistently criticized as inconsistent with broader doctrine; and (5) has proven “unworkable” or “outdated” with experience.
Quill fares poorly on every measure. It is a severely criticized, constitutional holding that itself warned when decided that it might later be reconsidered. It is also, in Justice Gorsuch’s words, a “precedential island … surrounded by a sea of contrary law.” And after 25 years of technological progress and economic changes, it has proven entirely out of date.
At this point, the only thing South Dakota’s petition asks the U.S. Supreme Court to do is agree to hear its case. U.S. Supreme Court review is discretionary; four of the nine justices must agree to hear any case. If the U.S. Supreme Court refuses to do so, the South Dakota Supreme Court ruling that South Dakota’s law is unconstitutional will stay in place.
It is possible the court could hear this case this term — meaning it would issue an opinion by the end of June 2018.
Marketplace Fairness Act of 2015 introduced in Senate
(S. 698); Remote Transactions Parity Act in the House (H.R. 2775)
In July, Congressman Jason Chaffetz (R-Utah) introduced the Remote Transactions Parity Act (RTPA, HR 2775).
So far, a bipartisan group of 33 House members (R: 18, D: 15) are co-sponsoring the bill. More are needed to move the legislation this year.
In the Senate, this year's legislation, the Marketplace Fairness Act of 2015, was introduced March 10 by Sen-ators Mike Enzi (R-Wyo.), Dick Durbin (D-Ill.), Lamar Alexander (R-Tenn.) and Heidi Heitkamp (D-N.D.).
E-fairness legislation, such as the Marketplace Fairness Act in the Senate (S. 698) and the Remote Transactions Parity Act in the House (H.R. 2775), would allow local governments the flexibility to collect the taxes already owed to them on remote online purchases removes an unfair disadvantage for local businesses, while helping cities close budget gaps. Collecting owed sales taxes means more money for basic services, such as roads and police officers, without increasing the overall federal deficit.
Each year, an estimated $23 billion in owed sales tax goes uncollected from online transactions, funds that cities cannot use on public safety, fixing sidewalks, building libraries, and many more services for their residents. In 1992, the Supreme Court's Quill decision urged Congress to address the issue of sales tax collection by remote sellers. Moreover, the recent decision by the Supreme Court not to consider a case involving a state law, in New York v. Amazon, magnified the need for Congress to level the playing field for all sellers as quickly as possible. Now is the time for Congress to close the online sales tax loophole.
Election year politics in 2016 will make it only more difficult to pass the bill if Congress delays.
Call on your representative to cosponsor H.R. 2775 and your senators to cosponsor S. 698 because e-fairness: • Is good for local retailers and creates a level playing field. Main Street retailers currently oper-ate at a 5-10 percent disadvantage because they are required to collect sales taxes while remote sellers are not.
• Is not a new tax. E-fairness simply allows states and local governments to enforce existing sales tax laws. It does not create new taxes or increase existing ones. • Is good for our residents and communities. By allowing local governments to collect an esti-mated $23 billion in uncollected sales taxes on remote sales that are already owed, cities can better provide services to residents at no cost to the federal government.
upated 8/13/2015
Congress adjourns without enacting Marketplace Fairness Act
So close - but so far away. Although Congress adjourned last year without enacting marketplace fairness legislation, it came closer to becoming reality than ever before.
The Act passed the Senate in May 2013 with broad, bipartisan support by a vote of 69 - 27. Sens. Lamar Alexander and Bob Corker were among the bill's host of sponsors. However, the bill stalled in the House where opponents and outside groups had succeeded in characterizing the initiative as a tax increase.
Unlike bricks-and-mortar retailers, which collect sales tax at the time of the sale and remit payment to the state, online retailers are not obligated to collect and remit sales tax due on purchases. It's not that sales tax are not to be paid when making online purchases, but rather that the obligation for payment of sales tax on online purchases rest with the shopper rather than the retailer. In other words, shoppers are supposed to self-report and submit payment for state and local sales tax due on items they have purchased online, but almost no one does.
According to the most recent estimates prepared by the UT's Center for Business and Economic Research, the state and local governments of Tennessee have failed to receive some $750 million in sales taxes revenues due to shoppers' failure to self-report and remit sales taxes legally due on their online purchases. As such, it is not a new tax but a long-existing tax that has been grossly under collected.
In addition to the lost state and local revenue, the current practices have created a great inconsistency that interferes with the free market in affording online merchants a pricing advantage over traditional bricks-and-mortar stores that collect sales tax. Over the last decade, bricks-and-mortar retailers have become increasingly unified in their call to enforce the existing law and require online retailers to collect and remit sales tax just as they do.
In requiring online retailers to collect and remit the sales taxes legally due on each sales transaction, the Marketplace Fairness Act sought to: 1. Ensure existing tax laws are followed and revenues due state and local governments are properly collected and remitted in the most efficient and reliable method, and 2. Level the playing field between bricks-and-mortar and online retailers.
Any legislation not passed by both houses and signed by the president at the conclusion of each Congress must begin the process anew.
U.S. Rep. Jason Chaffetz, a Republican from Utah, and other cosponsors of the original Marketplace Fairness legislation have met with Speaker Boehner to discuss plans for the upcoming Congress. At this point discussions continue and revisions are being made to attract more supporters.
last updated 1/15/2015
Urge Your Senator to Support S 2609, the Marketplace & Internet Fairness Tax Act
On July 15, 2014, Senators Enzi (WY), Durbin (IL), Alexander (TN), Heitkamp (ND), Collins (ME) and Pryor (AR) introduced the Marketplace and Internet Tax Fairness Act (MITFA). The legislation combines the Marketplace Fairness Act, which passed the Senate last year with a strong bipartisan majority (69-27), with a ten-year extension of the Internet Tax Freedom Act (ITFA.) Additional co-sponsors of the legislation are Senators Landrieu (LA), Roy Blunt (MO), Jack Reed (RI), Sheldon Whitehouse (RI), Benjamin Cardin (MD), Tim Johnson (SD), Amy Klobuchar (MN) and Al Franken (MN).
With most Senators returning to the districts during the five week August recess and with the potential for a Senate vote on MITFA as early as September when the session resumes, now is the time for local leaders to meet with their Senators and urge their support for this important legislation.
Earlier this summer, the House, which has yet to schedule action on MFA, passed the Permanent Internet Tax Freedom Act. NLC opposed the bill because it would permanently strip local governments of the authority to tax or impose fees on Internet access; cost the seven states who are grandfathered under the original ITFA legislation $500 million a year in revenues; and fails to recognize the enormous technological changes underway that could end up shielding a rapidly growing sector of our economy from state and local taxation.
last udpated 8/25/2014
House GOP takes steps on Internet Sales Tax legislation
House Judiciary Committee Chairman Bob Goodlatte released an outline of how he thinks online sales tax legislation should proceed, signalling that the issue could once more gain momentum.
The outline seems to suggest that Goodlatte believes the existing online sales tax bill, the Marketplace Fairness Act (MFA), isn't simple enough, and that some serious tweaks need to be made.
"The aim of the principles is to provide a starting point for discussion in the House of Representatives," Goodlatte said in a statement.
The Marketplace Fairness Act, introduced by U.S. Rep. Steve Womack earlier this year, passed on a bipartisan basis in the Senate in May. But since then, Womack's bill has stalled in the House, where Goodlatte and Speaker John Boehner quickly expressed skepticism of the legislation.
The announcement didn't mention the existing MFA legislation, but Womack said Goodlatte's points "reflect the spirit of the Marketplace Fairness Act, and I am extremely supportive of and encouraged by them."
The document emphasizes that online sales tax legislation shouldn't be used to create new taxes that don't exist offline. It also says online retailers shouldn't have a sales tax compliance burden that's greater than what brick-and-mortar stores face.
Critics of the Marketplace Fairness Act argue it would be too difficult for online businesses to collect sales taxes because they would need data on sales tax rates and policies from a vast number of jurisdictions. But advocates for the bill say online retailers would be provided with software to make such calculations simple.
The committee's outline also says "states should be sovereign within their physical boundaries." Some MFA skeptics have said states might aggressively try to collect sales taxes outside of their borders; Goodlatte would seemingly make that less difficult.
Though the Marketplace Fairness Act exempts businesses that make less than $1 million a year in online sales, Goodlatte says the law should be so straightforward and compliance should be so simple that a small business exemption would be unnecessary.
Lars Etzkorn, program director for federal relations at the National League of Cities, said the list of principles released by Goodlatte didn't contain any "fatal flaws," and they are all issues that have been raised and debated for many years.
"He wants to have his fingerprints on the final product instead of just taking over that which the Senate passed," Etzkorn said.
Etzkorn says he's optimistic that Goodlatte will work to pass a bill, but the true test of his commitment will be revealed based on how soon a hearing is held.
last updated 9/19/2013
A Resolution in support of the Marketplace Fairness Act is available here.
U.S. Senate approves Marketplace Fairness Act, headed to House
The U.S. Senate overwhelmingly passed the Marketplace Fairness Act last week with a vote of 69-27 in favor of the legislation.
The bill now goes to the House, where it is believed to have a harder time. If approved, the Act would allow state and local governments to collect sales taxes on online and remote sales that are already owed. It does not create a new tax or increase any existing tax; it simply provides for the enforcement of state and local governments' authority.
The change is estimated to generate billions of dollars for state and local governments. According to the National Conference of State Legislatures, states have lost as much as $23.26 billion in uncollected revenues. NCSL estimates that for 2012, Tennessee lost some $748.5 million in revenues.
The legislation also aims to level the playing field between traditional brick and mortar retailers who are required to collect sales taxes at the time of purchase and the online retailers who are not.
Sens. Lamar Alexander and Bob Corker are part of a bipartisan group of 26 senators who support the legislation.
In the House, 65 representatives have joined the primary sponsor, Rep. Steve Womack (R-Arkansas), as co-sponsors. From Tennessee, Reps. Jimmy Duncan, Jim Cooper, and Steve Cohen have signed onto the legislation. No hearings have been scheduled yet in the House.
According to Governing Magazine, one of the biggest challenges in the House will be due to anti-tax pledge many members have signed in which they've vowed not to raise taxes. Grover Norquist, the man behind that pledge, has come out as an opponent of the legislation.
E-bay also opposes the legislation, whereas Amazon supports it. Amazon is part of a Marketplace Fairness Coalition that represents nearly 3 million retailers, companies and business groups nationwide who have come together to promote efforts to get the legislation approved during this session of Congress. The vote last week by the Senate, is the furthest the legislation has ever advanced. State and local leaders have pushed for legislation like the Marketplace Fairness Act since 1999, when the Streamlined Sales Tax Project (SSTP) was created for the purpose of developing an implementing a simplified taxing system in order for business to collect sales tax on remote sales.
Under the Marketplace Equity Act, states that didn't want to collect taxes on Internet sales could choose not to. Five states - Alaska, New Hampshire, Delaware, Montana and Oregon - have no sales tax.
The bill also exempts smaller Internet merchants, those with gross revenues of $1 million in annual sales or less.
last updated 5/13/2013
On April 25, the Marketplace Fairness Act advanced in the Senate by clearing its fourth procedural hurdle this year (its third this month.)
The U.S. Senate voted to end debate on the bill, by a vote of 63-30, making way for a final vote on the legislation.
"This is an important Senate vote for states' rights, for the prerogative of states to set their own tax policies and to permit states to honor the conservative principle of not picking winners and losers among taxpayers and businesses," said U.S. Sen. Lamar Alexander, who is a lead co-sponsor on the bill.
The Marketplace Fairness Act would grant states the option to require that remote businesses, such as those selling online or through catalogs, collect sales taxes on purchases within their borders. Currently, remote businesses do not have to collect sales taxes in the states they sell into, while brick-and-mortar businesses do, creating a price disadvantage.
Alexander sponsored the legislation along with Senators Mike Enzi (R-Wyo.) and Dick Durbin (D-Ill.) and a bipartisan group of 26 other senators, including Senator Bob Corker (R-Tenn.). The legislation also has the support of Tennessee's Republican Gov. Bill Haslam, as well as other Republican governors and conservative leaders across the country.
Following the cloture vote, the Senate adjourned for a one week recess and will return for final consideration of the bill on Monday, May 6.
last updated 4/26/2013
A proposal to allow states to collect online sales taxes was reintroduced in the both the Senate and the House on Feb. 14, 2013, with support for the measure growing among Republican and Democratic governors and state legislators.
Senator Richard Durbin offered the bill on the heels of President Obama's State of the Union speech, where he listed overhaualing the U.S. tax code as one of his top priorities.
The Marketplace Fairness Act was introduced by Durbin, an Illinois Democrat, and two Republican counterparts, Sen Lamar Alexander and Sen. Mike Enz.
The Durbin bill was expected to exempt from sales tax collection any merchant with $1 million in annual sales or less. That would be an increase from a prior cap of $500,000. This change would bring the Senate bill in line with previous versions in the House of Representatives
last updated 2/14/13
On Tuesday, July 24, Governor Haslam delivered remarks, on behalf of the National Governor's Association, before the full House Judiciary Committee concerning H.R. 3179, a bill to improve the States' rights to enforce the collection of sales taxes associated with online purchases. We will distribute the text of the governor's remarks as soon as it is available. H.R. 3179, known as the "Marketplace Equity Act of 2011," authorizes states to require all sellers making remote sales to collect and remit sales and use taxes with respect to such sales into the state, without regard to the location of the seller, if such states implement a simplified system for administration of sales and use tax collection for remote sellers. Requires such a system to include, at a minimum: (1) an exception for remote sellers with gross annual receipts in the preceding calendar year from remote sales not exceeding $1 million in the United States or not exceeding $100,000 in the state, (2) a single sales and use tax return for use by remote sellers and a single revenue authority within the state with which remote sellers are required to file a tax return, and (3) a uniform tax base throughout the state The bill also defines "remote sale" as a sale of goods or services attributed to a state with respect to which a seller does not have adequate physical presence to establish a nexus so as to allow such state to require such seller to collect and remit taxes.
Above you will find a link to remarks offered by Gov. Haslam to House Judiciary committee, as well as Senator Alexander's remarks on the Senate floor in February in support of the bill. Other links include a copy of the bill's full text and list of cosponsors in the U.S. House of Representatives, as well as several articles written about the collection of sales taxes on Internet sales.
last updated 7/24/2012
Bills were introduced in both houses of Congress July 29, 2011, to require the collection of sales taxes by out-of-state Internet sellers.
Both bills are titled the Main Street Fairness Act (S. 1452 and H.R. 2701). The bill was introduced by Sen. Richard Durbin (D-Ill.) in the Senate and by Reps. John Conyers (D-Mich.) and Peter Welch (D-Vt.) in the House. The legislation is co-sponsored by Sens. Tim Johnson (D-S.D.) and Jack Reed (D- R.I.) in the Senate and Rep. Heath Shuler (D-N.C.) in the House.
Neither bill was introduced with Republican co-sponsors.
The bills are supported by Amazon.com Inc., the largest online Internet retailer, which previously opposed many state-specific attempts to compel online retailers to collect state sales tax.
"Amazon.com has long supported a simple, nationwide system of state and local sales tax collection, evenhandedly applied to all sellers, no matter their business model, location or level of remote sales," said Paul Misener, Amazon's vice president for global public policy.
The bills will "allow states that sufficiently simplify their rules to require collection of sales tax by out-of-state sellers," Misener said.
eBay, however, opposes the bills because they impose "new taxes and regulatory burdens" on small online businesses, according to Brian Bieron, eBay's senior director of federal government relations and global public policy.
"A collection of state tax commissioners have again been able to get an outdated Internet sales tax bill introduced in Congress, but we are confident that it will be rejected because it would harm small Internet retailers," Bieron said.
Local retailers argue they are at a competitive disadvantage because they collect sales taxes while out-of-state retailers, including many large online and catalog retailers, in effect give their customers a discount by collecting no state or local sales taxes.
Under a Supreme Court ruling, known as Quill, retailers are only required to collect sales tax in states where they have brick-and-mortar stores. Consumers must report to state tax departments any sales taxes they owe for their online purchases.
As a result, 44 states and the District of Columbia have worked with the business community and local governments and their representatives, including NLC, to adopt a comprehensive interstate system, called the Streamlined Sales and Use Tax Agreement, to harmonize and simplify their sales tax rules and administrative requirements.
To date, 24 states comply with this interstate agreement. But the Quill decision made it clear that Congress must authorize and sanction such an agreement. The Main Street Fairness Act does that while providing financial assistance for online retailers and small businesses to implement the requirements.
last updated 8/5/2011
The Streamline Sales Tax Governing Board adopted an amendment that allows states to keep situs sourcing for in-state purchases while also receiving the benefit of destination sourcing for out-of-state purchases, thereby eliminating the primary objection to the agreement. Now that the sourcing issue is off the table, many cities stand to benefit from the implementation of the Streamlined Sales Tax agreement.
Any provision that has not already taken effect is scheduled to do so July 1, 2011, which means that it is highly likely that the future of the Streamlined Sales Tax Agreement's is up for discussion this year.
However, the member states that have adopted the SST agreement only account for 144 congressional seats. So in order for the legislation to pass at the federal level 74 congressmen from states not supporting the agreement will have to vote in favor of it.
TML staff plans to meet with the Governor and Commissioner of Revenue on this issue.
Background
As a result of U.S. Supreme Court rulings, out-of-state vendors with no physical presence in a state cannot be compelled to collect state and local sales taxes. As catalog, mail order, and Internet commerce have grown, state and local governments have been experiencing ever-increasing losses in sales tax revenue. For state and local governments that rely heavily on the sales tax, loss of revenue due to “remote sales” is of particular interest. These concerns gave rise to the multi-state Streamlined Sales Tax Project, which has proposed a uniform framework for taxation that would eliminate the wide variations in sales tax law among all states that conform to the common framework.
In 2000, the Streamlined Sales Tax Project (SSTP) was created for the purpose of developing and implementing a simplified taxing system. In 2002, SSTP reached consensus on the Streamlined Sales and Use Tax Agreement that took effect on October 1, 2005. Initially, 34 states, including Tennessee, signed and expressed interest in conforming their state’s laws to the requirements stipulated in the Agreement. However, only 13 states had enacted legislation and were fully participating in the Agreement on its effective date.
In 2003, the General Assembly adopted legislation (Public Chapter 357) bringing the state’s tax structure, rates, and definitions into compliance with the requirements of the Agreement. One year later, the General Assembly approved a bill making technical corrections to the 2003 legislation and establishing an effective date of July 1, 2005, for Tennessee’s streamline legislation.
Upon review, the Tennessee Municipal League determined that implementation of the state’s streamline legislation would result in a dramatic shift in local sales tax revenues, substantially alter municipalities’ incentive for economic development, and introduce a degree of uncertainty into the annual budget process.
To comply with the Streamlined Sales and Use Tax Agreement, the state must change the sourcing of sales tax revenues from the point of sale (point-of-sale sourcing) to the point at which the buyer takes possession of the item (destination sourcing).
Dr. Bill Fox, Executive Director of the Center for Business and Economic Research at the University of Tennessee, projected 193 cities will experience an increase in local option sales tax revenues, 150 cities will experience a decrease in local option revenues, and four cities will experience no measurable impact as a result of the sourcing change required under the streamline legislation. However, the estimated cumulative increase for the 193 “winners” is just $19 million, while the 150 “losers” are estimated to experience a cumulative decrease of $57 million – a difference of $38 million. Or said another way, $19 million in local sales tax revenues will be redistributed among cities while $38 million in local sales tax revenues will shift from municipalities to counties upon implementation of destination sourcing.
In 2005, the General Assembly adopted legislation that delayed implementation of Tennessee’s streamline legislation and the state’s full participation in the Streamline Sales and Use Tax Agreement until July 1, 2007. Absent any intervening actions by the General Assembly, Tennessee’s streamline legislation and the sourcing change would have been implemented this year. However, last session, Governor Bredesen delayed the implementation of the streamlined sales tax provisions on sourcing until July 1, 2009.
On December 11, 2007, the Streamlined Sales Tax Project (SSTP) adopted a proposal to allow the states participating in the project to maintain point-of sale sourcing on intrastate commerce, but to implement destination sourcing on interstate commerce, which satisfies the concerns TML has about the issue. The Streamlined Sales Tax Governing Board unanimously approved the amendment.
The following provisions become effective on January 1, 2008: most of the streamlined sales tax uniform definitions; provisions concerning the registration of farmers for sales tax exemption purposes; provisions concerning the optional centralized registration system; and provisions concerning the optional use of certified service providers or certified automated systems for sales tax collection and remittance.
