U.S. Supreme Court hears conflict over tax-free online sales

Organized veterinary medicine supports change; verdict anticipated in June

May 2, 2018 (published)
By Jennifer Fiala

This story has an important update

The U.S. Supreme Court is expected next month to decide whether states can force out-of-state retailers to collect sales taxes on purchases made by residents.

Justices heard oral arguments on April 17 in South Dakota v. Wayfair, Inc., a case that's received national attention for challenging a 1992 Supreme Court ruling that bars state governments from compelling retailers without a physical presence in the state to collect sales tax.

In other words, sellers need not collect sales tax from customers who live outside of the seller's state. A decision in South Dakota's favor could erase the tax advantage that, for instance, online pharmacies and other remote retailers have over brick-and-mortar businesses such as veterinary practices, advocates of the veterinary profession say. 

But first, case law that predates the internet boom must be overturned. In 1992's Quill v. North Dakota, justices found that the constitution's Commerce Clause provided legal basis for the physical-presence requirement. During recent years, dozens of states have passed laws defying the 26-year-old verdict. In the relevant instance, South Dakota enacted a law in 2016 that requires out-of-state retailers to collect sales tax if they do $100,000 or more worth of business or make more than 200 transactions with residents.

After the law passed, South Dakota sued four internet retailers — online home goods sellers Wayfair and Overstock, tech company Newegg and industrial equipment supplier Systemax — for failing to comply. Systemax dropped out of the lawsuit and registered with the state to collect sales tax. Wayfair, Overstock and Newegg remain co-defendents. 

On March 6, 2017, the Sixth Judicial Circuit Court of South Dakota struck down the remote sales tax statute because it was "duty bound" to abide by Quill, which has led to the Supreme Court review. 

South Dakota asserts that state coffers are being shortchanged, and the precedent set in Quill is antiquated. Backing South Dakota are at least 25 states along with businesses and trade organizations that assert online and mail-order companies enjoy an unfair price advantage over brick-and-mortar retailers. The ruling could impact the veterinary profession, which has long reviled the tax breaks internet retailers gained under Quill.

The American Veterinary Medical Association filed a brief in November that supports South Dakota, asserting that the sales-tax exemption afforded to online pharmacies and pet-supply stores gives them an unfair edge over veterinary practices that sell medications and other pet supplies. In a blog post on Friday, the AVMA stated: "In 2016, Americans spent $28.23 billion for pet food and $14.71 billion for over-the-counter medicine and supplies — which means there are serious economic consequences of this exemption." 

South Dakota Attorney General Marty Jackley relayed as much on April 17 during his testimony before justices.

"There are two very significant consequences brought by Quill," he stated. "First, our states are losing massive sales tax revenues that we need for education, health care and infrastructure. Second, our small businesses on Main Street are being harmed because of the unlevel playing field created by Quill, where out-of-state remote sellers are given a price advantage."

Justice Sonia Sotomayor countered: "Actually, they're put at a disadvantage not by Quill but by the fact that there are massive discount sellers, not just on the internet, but even in stores now." She posited that a reversal of Quill would force remote sellers to pay high costs tied to implementing and maintaining systems to collect and remit sales taxes on a state-by-state basis.

Jackley responded that all of the sellers named in the lawsuit already have implemented software to do just that.

Burden or obligation?

Throughout the hearing, justices pointed to varying predictions outlined in the case about the burden and expenses incurred by remote sellers if they're forced to account for 12,000 or so separate sales-tax jurisdictions across the United States. Reports of how much states stand to collect in tax revenues also conflict. South Dakota estimates that it and other states stand to gain $34 billion if Quill is overturned; the Government Accountability Office says it's more like $8 billion to $13 billion.

George Isaacson, senior partner with Brann & Isaacson, represented Wayfair and co-defendants Overstock and Newegg. He told justices that taking a patchwork, state-by-state approach to sales-tax collection is onerous to remote merchants.

While questioning Isaacson, Justice Ruth Bader Ginsburg repeatedly called Quill "obsolete." She proposed that he address the "very basic issue" of the case: "The assertion is that asking an out-of-state seller to collect tax on goods shipped in-state discriminates against interstate commerce," she said.

"But, as I see it," Ginsburg continued, "why isn't it, far from discriminating, equalizing sellers; that is, anyone who wants to sell in-state, whether an in-state shop, out-of-state shop, everybody is treated to the same tax-collection obligation. …Why isn't that equalizing rather than discriminating?"

Isaacson responded that legal precedent supports the idea that commerce would be impeded by burdening remote companies with obligations to collect and remit sales taxes to thousands of tax jurisdictions with "varying rates, varying exemptions, varying taxability items, varying filing requirements and audit obligations."

Justice Neil Gorsuch asked Isaacson to more directly address Ginsburg's question. Isaacson replied that "borders … are a key part of federalism in this country. So, if there's going to be some standard that determines when a company is subject to the tax jurisdiction of a state, using the … territorial limits of that state make sense."

He added that most of the nation's largest retailers already collect and remit sale taxes "because the nature of the market has required them to establish a local presence. Among the 100 top internet retailers, the collection rate is between 86 to 97 percent."

Unsatisfied, Gorsuch rephrased: "You're — you're — you're just merely pointing out that more internet retailers are moving toward brick and mortar. Fine. But, again, why should this court favor those who don't over those who do? That's the question."

Without providing a direct answer, Isaacson suggested that Congress should address the sales-tax dilemma. One solution, he said, might be to "require one rate per state for all remote sales."

Jackley countered that "Congress doesn't have an incentive in this instance to take action in something that could be perceived as a tax when yet they don't get the opportunity to use the revenue."

Update: In a decision issued June 21, the U.S. Supreme Court upheld South Dakota's law that requires online retailers to collect and remit sales taxes, regardless of whether they have a physical presence in the state. This means that online pet pharmacies must charge sales taxes to customers, just as veterinarians selling medications in their practices do.



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