About Time: DOJ Backs States in Sales Tax Case

Nelson Mullins Riley & Scarborough LLP

Nelson Mullins Riley & Scarborough LLP

One of the early reported pillars of the Trump Administration was the idea of promoting federalism – let power be centered in states.  That commitment was on display yesterday as the US Solicitor General filed an amicus brief backing South Dakota’s bid to tax Internet retailers. 

In 1992, the US Supreme Court concluded that state tax requirements were too burdensome to require any business other than one physically present in a state to collect sales taxes.  Known as the Quill case, the decision trampled on state tax authority by removing remote sellers like Internet retailers from state collection requirements.

Times have changed. Today web purchases account for more than 13 percent, or $453 billion of retail sales, much of it untaxed at the state level.  The artificial distinction created by Quill has been a boon for online sellers and a salted wound for brick and mortar stores and communities.  As the Solicitor General recognized:

 “A constitutional rule exempting certain out-of-state retailers from applicable state-tax-collection requirements imposes a competitive disadvantage on in-state retailers and encourages the State’s citizens to take their business elsewhere.  It also discourages out-of-state businesses from acquiring property or employing people in the State, since any physical presence – no matter how insignificant and unrelated to the businesses commercial activities—would subject them to the same tax-collection responsibilities as in-state businesses.”

Congress could have fixed this.  Dozens of bills have been filed over the years to address the disparity between online merchants and Main Street storefronts.  Unfortunately fears of being tagged as the politician who “taxed the Internet” have outweighed common sense or the idea of letting the market, rather than accidental tax policy, determine winners and losers. 

In the absence of Congressional action, states took matters into their own hands.  First they authored the Streamlined Sales and Use Tax Agreement, a deal between businesses and states to encourage collection of sales taxes in return for simpler laws and regulations. Then when Congress failed to bless that effort, states like South Dakota passed laws to directly challenge Quill and emphasize that 2018 is not 1992.

Now it is the Supreme Court’s turn. Many observers are encouraged that the Court took the case and is poised to take action this year.  They also recognize, as does the Solicitor General, that the Justices are usually reluctant to ignore precedent, especially those “that Congress has the power to overturn.” That being said, it is time for the judicial branch to join the executive branch and support what states have long said: be fair to all businesses; respect state tax authority; overturn Quill.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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