Magazine article Government Finance Review

Online Sales Tax Legislation: A New Congress Revisits a Familiar Discussion

Magazine article Government Finance Review

Online Sales Tax Legislation: A New Congress Revisits a Familiar Discussion

Article excerpt

On March 3, 2015, Supreme Court Justice Anthony Kennedy invited a legal challenge regarding whether states can require out-of-state and online retailers to collect sales taxes. Kennedy's opinion was issued as part of the Supreme Courts unanimous ruling in the case of Direct Marketing Association v. Brohl, which examined what types of cases are allowed to file suit under the Tax Injunction Act (TIA). The TIA prohibits federal courts from blocking state tax collections, assessments and policies. The Supreme Courts ruling will be viewed as undoing the Colorado law requiring remote sellers to report Colorado consumers' remote purchases for the purpose of collecting sales and use taxes, and could narrow the scope of the online sales taxes in other states, as well as open a door for legal challenges in other jurisdictions.

However, Kennedy's comments reveal the court's awareness of the need for federal intervention to enable states to collect e-commerce taxes. In his opinion, Kennedy added that he believes that the Quill and National Bellas Hess decisions establishing the physical presence rule for sales tax are "now inflicting extreme harm and unfairness on the states." Kennedy cited the growth of Internet commerce, the reality of business presence even in the absence of physical presence, and his view that "it is unwise to delay any longer a reconsideration of the court's holding in Quill.... The legal system should find an appropriate case for this court to reexamine Quill and Bellas Hess."

QUILL AND BELLAS HESS

Two U.S. Supreme Court decisions of the previous century (before the Internet was popular) established federal law with respect to remote sales tax collection as we know it today--the 1967 National Bellas Hess v. Department of Revenue of Illinois case and the 1992 Quill Corp. v. North Dakota. In the first case, the Illinois Department of Revenue attempted to force catalog retailer Bellas Hess, which was based in Kansas City, to collect Illinois sales tax. Bellas Hess refused. In its ruling on the case, the Supreme Court said that only businesses with nexus in a state have to collect sales tax for that state. Nexus is created by a physical presence. The Bellas Hess decision was reaffirmed in 1992 when North Dakota tried to require Quill Corporation, a mail-order office supply company incorporated in Delaware, to collect tax on its sales into the state. Quill refused on the grounds that it had no physical operations or employees in North Dakota. However, in the Quill ruling, the Supreme Court specifically invited Congress to exercise its authority to overrule the Supreme Court by enacting legislation: "Our decision is made easier by the fact that the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve ... 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."

However, as Kennedy's comments recognize, remote sales have changed dramatically since 1992 through the advent of e-commerce, and federal law has not kept pace. The absence of an update has left brick and mortar retailers at a 6 to 10 percent price disadvantage, compared with online retailers. According to the U.S. Department of Commerce, e-commerce sales in 2005 were $87 billion, and grew by nearly 40 percent to $225.5 billion in 2012. Online sales continued to explode during the 2014 holiday season, with Black Friday sales netting $2.4 billion, a 24 percent increase over Black Friday 2013, according to Adobe. 2014 Cyber Monday sales reached $2.04 billion, according to analytics firm comScore, rising 17 percent oversales for the popular online shopping day in 2013. And as online sales continue to increase, the amount of taxes on these sales that are not being paid to state and local governments to provide critical community services is likely to grow considerably. …

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