State and local governments, including school districts, are watching with great interest as the U.S. Supreme Court on Tuesday takes up a case that could result in adding billions of dollars in tax revenue to their coffers.
In South Dakota v. Wayfair Inc. (Case No. 17-494), the justices will weigh whether to overrule or distinguish two precedents that bar a state from forcing out-of-state sellers to collect sales taxes on purchases from residents unless the sellers have a “nexus,” or a physical presence, in that state.
A decision for South Dakota, which seeks to impose its sales tax on remote sellers who reach certain thresholds for sales or the number of transactions, could add $50 million to its treasury, the state estimates.
For the 45 states and the District of Columbia that have sales taxes, the estimates for revenue lost annually to the physical-presence rule ranges from $8 billion to as much as $34 billion.
“The physical nexus requirement results in a loss of crucial revenue from owed taxes that state and local governments depend on to fund basic government functions,” including education, says a friend-of-the-court brief filed on South Dakota’s side by the National Governors Association and joined by four education groups—the National School Boards Association, AASA, the School Superintendents Association, the National Association of Elementary School Principals, and the Association of School Business Officials International.
South Dakota, in its brief, argues that as Internet sales by out-of-state sellers have risen, state revenues have decreased, “leading to serious shortfalls.”
In 2016, “the legislature felt compelled to raise the sales-tax rate to help increase teacher salaries,” the state says.
That same year, South Dakota passed a law that challenges the two U.S. Supreme Court decisions establishing the physical-presence rule for taxing out-of-state sales.
The 1967 precedent was National Bellas Hess Inc. v. Department of Revenue of Illinois, in which the court held that under its commerce clause jurisprudence, states could not collect sales or use taxes from out-of-state retailers unless the retailer had a physical presence such as facilities or sales representatives. A quarter-century later, in its 1992 decision in Quill Corp. v. North Dakota, the court somewhat reluctantly upheld the rule from Bellas Hess as a matter of stare decisis.
In 2015, in a case related to state sales and use taxes, Justice Anthony M. Kennedy called for the court to “reexamine” the two precedents.
“Because of Quill and Bellas Hess, states have been unable to collect many of the taxes due on” Internet purchases, Kennedy wrote. “States’ education systems, health-care services, and infrastructure are weakened as a result.”
The 2016 South Dakota law says that a retailer’s economic presence in the state, such as through the minimum $100,000 in sales or 200 transactions, is enough to establish a nexus that would require the retailer to collect sales taxes.
The state’s supreme court ruled against the law, saying that the physical-presence rule of Bellas Hess and Quill still prevailed.
In the Supreme Court, three retailers sued by South Dakota—Wayfair Inc., Overstock.com Inc., and Newegg Inc.—are defending the physical-presence requirement.
The retailers argue, among other things, that complying with the state and local sales tax requirements of some 12,000 taxing jurisdictions remains complex.
For example, “specific ‘back-to-school’ tax holidays are authorized in several states,” the retailers argue in their brief. “Some cover clothing but exclude clothing accessories; some include footwear, while others do not; some include school supplies, but define the covered products differently; many set caps on the maximum exempt amount of purchases of particular products. The variations are nearly endless.”
The retailers say the sales-tax issue should be determined by Congress.
A decision is expected by late June.