SIOUX FALLS, S.D. (CN)—The U.S. Supreme Court agreed Friday to take up a case determining whether internet retailers need to pay sales tax to the state governments wherein their customers reside.
The high court’s decision in South Dakota v. Wayfair could overturn a 26-year-old legal precedent and dramatically shift the impact e-commerce plays in states such as South Dakota where no income tax is collected and much of state revenue is generated through a sales and use tax.
“I hope this means the Court is open to revisiting the important issue of taxation of online sales,” Republican South Dakota Gov. Dennis Daugaard said in a statement.
For two years in a row, South Dakota has had disappointing tax collections limiting its fiscal spending. As more and more shoppers skip lines at brick-and-mortar stores and buy their blue jeans or sofas online, fewer dollars have flowed into state coffers. That’s because e-commerce sales tax has been driven largely by 1967’s National Bellas Hess v. Illinois, in which the court ruled Illinois could not collect sales tax from a mail-order catalog business located in Missouri. A 1992 decision—Quill Corp. v. North Dakota—further underscored this jurisdictional requirement.
Hoping to reverse this decision, in 2016 South Dakota’s state legislature passed a law imposing out-of-state merchants to remit sales tax for items purchased by South Dakota customers. But this September, the South Dakota Supreme Court unanimously struck down the law.
Justice Glen Severson wrote that the two U.S. Supreme Court decisions requiring a business to have a physical presence in the state to remit sales tax tied the justices’ hands when it came to considering the new law.
“We see no distinction between the collection obligations invalidated in Quill and those imposed by Senate Bill 106,” Severson said in the court’s opinion.
At the time of his oral argument before the state’s high court, South Dakota Attorney General Marty Jackley likened the debate at the state’s Supreme Court to intentionally walking the batter. He had set his sights higher.
“They [the state Supreme Court] made us eligible for the October 2017 Supreme Court docket,” he said.
With Friday’s announcement that the high court will hear South Dakota v. Wayfair, Jackley’s wish has been granted. An association of shopping centers, booksellers, and 35 other states – including Washington D.C. – signed a petition presented to the Supreme Court in support of South Dakota’s position.
But in a brief presented to the court in December, George Isaacson – lead attorney for Wayfair, Overstock.com and Newegg – argued forcefully against the state’s depiction of the Quill decision.
“The number of taxing jurisdictions has continued to mushroom,” wrote George Isaacson in the December 7 brief, arguing retailers are already under a “dizzying” array of tax obligations at the state, county, and municipal levels.
He says sales tax imposes a significantly larger burden on out-of-state companies than a simple income tax does.
Amazon, which will soon comprise 50 percent of all online sales, already collects sales tax.
Isaacson also called South Dakota’s claim of losing $50 million annually on remote sales “exaggerated.”
“The perceived problem of uncontrolled use tax is self-correcting, not worsening,” he wrote.
In 2017, Colorado passed a law mandating large internet sellers inform residents of their use tax obligations. The South Dakota law goes further by compelling remittance.
When newly confirmed U.S. Supreme Court Justice Neil Gorsuch served on the 10th Circuit Court of Appeals, he wrote that Quill is “surrounded by a sea of contrary law.”
The White House may also be stepping into the sales tax fray. Earlier this month, South Dakota’s lone congresswoman, Republican Kristi Noem, told media that President Donald Trump had promised he would sign a bill requiring online merchants to collect sales tax.
Per its custom, the Supreme Court did not issue any comment Friday in taking up the case.