As you prepare to tackle your 2017 tax filings this spring, you may join the many Americans breezing over the part of their state return asking for a comprehensive record of everything they bought online without paying sales tax.
Some taxpayers aren’t aware that they are supposed to be tracking and reporting such transactions; others simply cannot be bothered to pay “use tax,” since states have few options for enforcing the rule. As a result, states lose significant money when residents purchase goods from out-of-state vendors who are not required to collect sales tax; one estimate projects that this amount will be $33.9 billion nationwide in 2018.
Almost exactly on schedule, the U.S. Supreme Court will again take up the question of whether states can force out-of-state vendors to collect sales tax for sales to their residents. The court said no 6-3 in the 1967 case National Bellas Hess, Inc. v. Department of Revenue of Ill., and again said no, 8-1, in 1992’s Quill v. North Dakota. Now a test case out of South Dakota is set for argument this term, with a decision likely by June.
The two earlier cases involved mail-order businesses; the new case, South Dakota v. Wayfair, focuses on internet commerce. But the underlying principle is the same. States want to require retailers to collect sales tax even if they have no physical presence in the state.
The Supreme Court was right the first two times, however, and the shift from mail-order to internet has not changed the underlying logic. The justices should leave the physical presence requirement in place until and unless Congress chooses to change it, exercising its exclusive powers under the Constitution’s commerce clause.
South Dakota v. Wayfair is a virtual rematch of Quill, though it involves the other Dakota. Even the arguments are the same: Modern technology allows out-of-state vendors to exploit the complaining state’s market, undermining the local tax base and unfairly competing with local vendors. Back in the ‘90s the technologies in question were 1-800 numbers, fax machines and overnight couriers; today, of course, the state’s archenemy is the internet and the nonresident businesses that employ it.
The argument has extended to suggest that the very technology states are fighting makes it simple for retailers to handle various tax requirements nationwide. In its petition to the Supreme Court, South Dakota said, “Asking today’s companies to undertake [tax collection] when they do substantial business with a state’s citizens imposes no undue burden.” Thirty-five other states – some of which had made their own moves toward pushing back against Quill – urged the court to take up this case. So did a variety of brick-and-mortar retailers, eager to see their online competitors handed this burden, undue or otherwise.
But when you boil it all down, not only are the arguments the same as they were all the way back to National Bellas Hess, but the conclusion should be too: Only Congress has the power to regulate interstate commerce, and thus to impose on a vendor in state A the obligation to collect and remit taxes on behalf of state B.
Congress hasn’t acted, and it is not because the issue has somehow escaped legislators’ attention. I wrote in this space in 2013 about the efforts of Sen. Heidi Heitkamp, D- N.D., to reverse Quill through legislation. Though that bill passed the Senate, there has been no meaningful legislative progress since. Even when states banded together to try to coordinate and streamline their sales tax rules in hopes of persuading Congress to mandate such interstate compliance, their pleas fell on deaf congressional ears. This was true when Democrats controlled the government in the first years of the Obama administration, and it remains true under Republicans today.
There are perfectly valid reasons why Congress might choose to reject states’ entreaties. Chief among them is the fact while 45 states (all except Oregon, Montana, Delaware, New Hampshire and Alaska) have general sales taxes, barely half – 23 plus the District of Columbia – have joined the Streamlined Sales Tax Project, designed to harmonize rules over which goods and services are subject to tax. Counting this as one set of rules, plus 22 other sets from noncompliant states, businesses might need to keep track not only of hundreds of varying rates (which modern software renders pretty easy), but of several dozen variations of exactly what is subject to tax (which software can’t readily do).
This would tilt the playing field in favor of big players like Amazon, which reversed its position on collection responsibilities once its expanding national footprint took away the advantage it once had as a non-collector. It might also encourage Americans to place their online orders from vendors abroad, who would continue to escape collection obligations, potentially costing American jobs and worsening our trade deficit.
These may or may not be valid considerations. Or the downsides to forcing out-of-state vendors to collect sales tax may be outweighed by states’ need to protect their tax base. But that is not a decision that was meant for judges to make – as the author of Quill, Justice John Paul Stevens, noted in that decision.
“Indeed, even if we were convinced that Bellas Hess was inconsistent with our Commerce Clause jurisprudence, ‘this very fact [might] giv[e us] pause and counse[l] withholding our hand, at least for now. Congress has the power to protect interstate commerce from intolerable or even undesirable burdens,’” Stevens wrote, quoting the earlier decision Commonwealth Edison Co. v. Montana. “In this situation, it may be that ‘the better part of both wisdom and valor is to respect the judgment of the other branches of the Government.’”
In other words, requiring internet retailers to navigate state sales tax rules may be fair, or it may not be. That is a decision for Congress. In the meantime, the Supreme Court would do well to let its previous wisdom stand.
Posted by Larry M. Elkin, CPA, CFP®
As you prepare to tackle your 2017 tax filings this spring, you may join the many Americans breezing over the part of their state return asking for a comprehensive record of everything they bought online without paying sales tax.
Some taxpayers aren’t aware that they are supposed to be tracking and reporting such transactions; others simply cannot be bothered to pay “use tax,” since states have few options for enforcing the rule. As a result, states lose significant money when residents purchase goods from out-of-state vendors who are not required to collect sales tax; one estimate projects that this amount will be $33.9 billion nationwide in 2018.
Almost exactly on schedule, the U.S. Supreme Court will again take up the question of whether states can force out-of-state vendors to collect sales tax for sales to their residents. The court said no 6-3 in the 1967 case National Bellas Hess, Inc. v. Department of Revenue of Ill., and again said no, 8-1, in 1992’s Quill v. North Dakota. Now a test case out of South Dakota is set for argument this term, with a decision likely by June.
The two earlier cases involved mail-order businesses; the new case, South Dakota v. Wayfair, focuses on internet commerce. But the underlying principle is the same. States want to require retailers to collect sales tax even if they have no physical presence in the state.
The Supreme Court was right the first two times, however, and the shift from mail-order to internet has not changed the underlying logic. The justices should leave the physical presence requirement in place until and unless Congress chooses to change it, exercising its exclusive powers under the Constitution’s commerce clause.
South Dakota v. Wayfair is a virtual rematch of Quill, though it involves the other Dakota. Even the arguments are the same: Modern technology allows out-of-state vendors to exploit the complaining state’s market, undermining the local tax base and unfairly competing with local vendors. Back in the ‘90s the technologies in question were 1-800 numbers, fax machines and overnight couriers; today, of course, the state’s archenemy is the internet and the nonresident businesses that employ it.
The argument has extended to suggest that the very technology states are fighting makes it simple for retailers to handle various tax requirements nationwide. In its petition to the Supreme Court, South Dakota said, “Asking today’s companies to undertake [tax collection] when they do substantial business with a state’s citizens imposes no undue burden.” Thirty-five other states – some of which had made their own moves toward pushing back against Quill – urged the court to take up this case. So did a variety of brick-and-mortar retailers, eager to see their online competitors handed this burden, undue or otherwise.
But when you boil it all down, not only are the arguments the same as they were all the way back to National Bellas Hess, but the conclusion should be too: Only Congress has the power to regulate interstate commerce, and thus to impose on a vendor in state A the obligation to collect and remit taxes on behalf of state B.
Congress hasn’t acted, and it is not because the issue has somehow escaped legislators’ attention. I wrote in this space in 2013 about the efforts of Sen. Heidi Heitkamp, D- N.D., to reverse Quill through legislation. Though that bill passed the Senate, there has been no meaningful legislative progress since. Even when states banded together to try to coordinate and streamline their sales tax rules in hopes of persuading Congress to mandate such interstate compliance, their pleas fell on deaf congressional ears. This was true when Democrats controlled the government in the first years of the Obama administration, and it remains true under Republicans today.
There are perfectly valid reasons why Congress might choose to reject states’ entreaties. Chief among them is the fact while 45 states (all except Oregon, Montana, Delaware, New Hampshire and Alaska) have general sales taxes, barely half – 23 plus the District of Columbia – have joined the Streamlined Sales Tax Project, designed to harmonize rules over which goods and services are subject to tax. Counting this as one set of rules, plus 22 other sets from noncompliant states, businesses might need to keep track not only of hundreds of varying rates (which modern software renders pretty easy), but of several dozen variations of exactly what is subject to tax (which software can’t readily do).
This would tilt the playing field in favor of big players like Amazon, which reversed its position on collection responsibilities once its expanding national footprint took away the advantage it once had as a non-collector. It might also encourage Americans to place their online orders from vendors abroad, who would continue to escape collection obligations, potentially costing American jobs and worsening our trade deficit.
These may or may not be valid considerations. Or the downsides to forcing out-of-state vendors to collect sales tax may be outweighed by states’ need to protect their tax base. But that is not a decision that was meant for judges to make – as the author of Quill, Justice John Paul Stevens, noted in that decision.
“Indeed, even if we were convinced that Bellas Hess was inconsistent with our Commerce Clause jurisprudence, ‘this very fact [might] giv[e us] pause and counse[l] withholding our hand, at least for now. Congress has the power to protect interstate commerce from intolerable or even undesirable burdens,’” Stevens wrote, quoting the earlier decision Commonwealth Edison Co. v. Montana. “In this situation, it may be that ‘the better part of both wisdom and valor is to respect the judgment of the other branches of the Government.’”
In other words, requiring internet retailers to navigate state sales tax rules may be fair, or it may not be. That is a decision for Congress. In the meantime, the Supreme Court would do well to let its previous wisdom stand.
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