Supreme Court divided over online sales taxes
Justices wary of altering long-standing precedent
WASHINGTON – The drive by cashstrapped state governments to collect more sales taxes from online retailers ran into skepticism Tuesday at the Supreme Court, where justices voiced concern about changing long-established rules of interstate commerce.
The effort to even the playing field between online and so-called “brickand-mortar” sellers, led by South Dakota, appeared to have four votes on the high court, but the magic number five seemed elusive.
Still, the eventual decision by the court — expected by late June — remained up in the air.
Several justices sympathized with the argument presented by South Dakota Attorney General Marty Jackley that states are losing revenue because many online retailers do not collect and remit sales taxes — and consumers don’t pay them voluntarily.
But they worried about the potential effect on the smallest online retailers if they change the rules, perhaps by overruling long-standing Supreme Court precedent that companies must be physically present in a state to be taxed. And they wondered whether the problem is correcting itself as the largest online retailers, led by Amazon, begin to collect the taxes.
By the end of an hour’s debate, it appeared that Chief Justice John Roberts and Justices Stephen Breyer, Samuel Alito, Sonia Sotomayor and Elena Kagan might uphold the court’s precedent and leave the current system in place. That would leave states unable to collect sales taxes from small and midsize online retailers without a physical pres- ence. Alito acknowledged that South Dakota’s new law, which would exempt out-of-state retailers with less than 200 transactions or $100,000 in sales annually from having to collect sales taxes, represented “the most reasonable incarnation of this scheme.” But other states, he said, might try “to grab everything they possibly can.”
The other justices pushed back on that argument, contending that the current system is unfair to traditional businesses that collect sales taxes on site. Justices Anthony Kennedy, Ruth Bader Ginsburg, Neil Gorsuch and presumably Clarence Thomas, who remained silent, were in this camp.
“More Internet retailers are moving toward brick and mortar,” Gorsuch noted. “But again, why should this court favor those who don’t over those who do?”
That’s what the high court decided in 1967 and again in 1992 when it exempted mail-order catalog companies from having to collect sales taxes. At the time, Amazon.com had not yet begun selling books out of Jeff Bezos’ garage.
But “times have changed,” South Dakota noted in court papers. Today, online sales are growing at four times the rate of total retail sales, and state and local governments in 45 states are losing billions of dollars annually in taxes. (Alaska, Delaware, Montana, New Hampshire and Oregon do not have sales taxes.)
Jackley said the states also are defending Main Street businesses that must pay the sales taxes many online sellers do not. And he pushed back on some justices’ suggestions that Congress should fix the problem because, as Justice Elena Kagan said, “Congress is capable of crafting compromises.”
“Congress has had 26 years to fix this problem,” he said.
But George Isaacson, the lawyer representing online sellers Wayfair, Overstock and Newegg, said online retailers could face some 12,000 tax jurisdictions if the Supreme Court sides with the states. That would lead to a “chaotic pe- riod” until Congress steps in, he said.
The battle over online sales taxes represents another in a string of cases that forces the Supreme Court to balance the Constitution and its own precedents against advances in technology.
When the court ruled in 1967 and 1992 that Illinois and North Dakota could not squeeze sales taxes from sellers with no presence in those states, there wasn’t nearly as much at stake. Now consumers do nearly 10% of their shopping online, a share that will grow exponentially in the future.
Congress protected those Internet sellers in 1998 legislation that has since been made permanent. Then in 2000, a national commission urged states to simplify their tax systems as a precursor to taxing remote sellers. Twenty-four states eventually did so, but the nation’s largest states with 70% of the U.S. population did not.
Stymied by the Supreme Court rulings and the Internet Tax Freedom Act, states have done their best to collect taxes on residents’ out-of-state purchases.
That has created a patchwork of laws. More than 20 states define a seller’s physical presence as including any affiliated website.
Ten states require out-of-state sellers to notify buyers and inform states of the unpaid sales taxes.
The Supreme Court in 2015 unanimously upheld Colorado’s law requiring those notices and reports. Kennedy went further than Thomas’ majority opinion, citing “a startling revenue shortfall” in many states and “unfairness” to local retailers and customers who pay the sales taxes.
And when the case returned to the U.S. Court of Appeals for the 10th Circuit, Gorsuch — an appellate judge at the time — said the half-century-old precedent was likely to “wash away with the tides of time.”