Magazine article Government Finance Review

Supreme Court to Decide Billon Dollar Sales Tax Case: In South Dakota V. Wayfair, a State Is Asking the U.S. Supreme Court to Rule That States and Local Governments May Require Retailers with No In-State Physical Presence to Collect Sales Tax

Magazine article Government Finance Review

Supreme Court to Decide Billon Dollar Sales Tax Case: In South Dakota V. Wayfair, a State Is Asking the U.S. Supreme Court to Rule That States and Local Governments May Require Retailers with No In-State Physical Presence to Collect Sales Tax

Article excerpt

In January 2018, the U.S. Supreme Court agreed to decide South Dakota v. Wayfair, a pivotal case for state and local governments. The State of South Dakota is asking the Supreme Court to rule that states and local governments may require retailers with no in-state physical presence to collect sales tax. This is an extraordinary development for states and local governments that have been waiting for decades for a federal solution to a fundamental challenge: Commerce plows ahead on a 21st-century platform while sales tax collection lags behind on a 19th-century platform. For decades, the marketplace fairness coalition has been stalled, denied the advancement of legislation authorizing the administration and collection of online sales taxes.

In selecting South Dakota v. Wayfair, the Supreme Court has signaled to the marketplace fairness coalition and finance officers across the country something that we have known for some time: That this is a current, urgent, and vital topic that must be addressed by the federal government. Now the coalition is faced with two probable solutions--a ruling in favor by the Supreme Court and the advancement of favorable legislation. This article describes the likelihood of advancing.

THE LEGISLATIVE SOLUTION

The Remote Transactions Parity Act. Also important, and related, is key legislation in Congress designed to simplify and standardize tax collection using a 21st-century platform. The Remote Transactions Parity Act (HR 2193) authorizes each member state under the Streamlined Sales and Use Tax Agreement (the multistate agreement for the administration and collection of sales and use taxes, adopted on November 12, 2002) to require all remote sellers that don't qualify for a small remote seller exception to collect and remit sales. It also requires them to use remote sales taxes under the provisions of the agreement, but only if that agreement includes minimum simplification requirements relating to the administration of the tax, audits, and streamlined filing.

The bill would compel retailers to collect taxes on remote sales based on the location of the consumer (this is known as destination-based sourcing). The state where the consumer resides could compel out-of-state retailers to collect remote sales taxes, either as a member of the Streamlined Sales Tax Governing Board or through the use of certified software providers. GFOA has long advocated for this legislation, as it outlines key mechanisms detailing the collection and distribution of sales taxes on online purchases.

While there are several compelling reasons why the Supreme Court might rule in favor of South Dakota (many of which are described below), a key byproduct is that this case clearly motivates Congress to act. It is the nature of Congress to own activities surrounding the Commerce Clause of the United State Constitution, so Congress would likely prefer to be the deciding factor in this case rather than deferring the decision to the Supreme Court. GFOA, along with a large coalition of state and local governments, retailers, and chambers of commerce, stands ready to urge Congress to take this "first mover" advantage.

AN ANALYSIS IN FAVOR OF A SOUTH DAKOTA RULING

In 1967, in National Bellas Hess v. Department of Revenue of Illinois, the Supreme Court held that per its Commerce Clause jurisprudence, states and local governments cannot require businesses to collect sales tax unless the business has a physical presence in the state.

Twenty-five years later, in Quill v. North Dakota (1992), the Supreme Court reaffirmed the physical presence requirement but admitted that "contemporary Commerce Clause jurisprudence might not dictate the same result" as the Court had reached in Bellas Hess.

Customers buying from remote sellers still owe sales tax, but they rarely pay it when the remote seller does not collect it. Congress has the authority to overrule Bellas Hess and Quill but has thus far not done so. …

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