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Supreme Court will force Congress to fix Internet sales tax

Packages move along a conveyer belt at the Amazon.com fulfillment center in Robbinsville, N.J.
Packages move along a conveyer belt at the Amazon.com fulfillment center in Robbinsville, N.J.Victor J. Blue

The battlefield between brick-and-mortar stores and Internet retailers could become a lot more level by the end of the year.

The U.S. Supreme Court is going to reconsider a ruling it made a quarter century ago to block states from collecting sales tax from retailers in other states. Justice Anthony Kennedy in particular thinks a ruling made during the mail-order era should be reconsidered for the Internet age.

Most online shoppers take for granted that most out-of-state retailers will not collect sales tax, an oft-cited reason for shopping the Internet instead of local stores. This bug, not a feature, comes from Quill vs. North Dakota, where the Court decided that a state government could not force a retailer to collect and remit sales taxes unless they have a physical presence within the state.

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The buyer still owes the tax, mind you, but the state tax authority has to go after the buyer, not the seller, if they want to collect. Needless to say, most buyers are not volunteering to pay sales tax, and most collectors only pursue major corporations which owe millions in unpaid taxes.

This casual tax evasion puts local retailers and governments at a huge disadvantage. Houstonians get an 8.25 percent discount when buying online instead of in-store, and Texas authorities lose about $1 billion in sales tax revenue, according to a Government Accountability Office report released last month.

Nationwide, state and local governments missed out on $13 billion last year, the GAO said. And that's after Amazon agreed to collect and remit sales tax. Third-party sellers in the Amazon Marketplace, though, are still not required to do so.

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Justice Antonin Scalia never imagined his 1992 decision would cause so much trouble. He simply believed this was an issue for Congress, not the Court.

"The underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve," Scalia wrote for the majority in Quill. "Accordingly, Congress is now free to decide whether, when, and to what extent the States may burden interstate mail-order concerns with a duty to collect use taxes."

Twenty-five years later and Congress has done nothing. New words, though, have entered the lexicon, such as online, Internet, e-tailing and dot.com.

"They wanted Congress to make some policy choices because there are a lot of trade-offs," said Matt Boch, a state and local tax expert at Dover Dixon Horne in Little Rock, Ark. "If you are a small to mid-size seller, you have some real compliance concerns about complying with local and state sales and use taxes across 10,000 or more taxing jurisdictions."

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Kennedy, who concurred in Scalia's opinion, wants a do-over.

"Although online businesses may not have a physical presence in some States, the Web has, in many ways, brought the average American closer to most major retailers," Kennedy wrote in a concurring opinion in 2015's Direct Marketing Association v. Broh. "A connection to a shopper's favorite store is a click away—regardless of how close or far the nearest storefront."

Kennedy invited states to produce a new law to test the Quill decision, all but guaranteeing a different outcome this time. South Dakota took him up on it.

The state's Legislature passed a law requiring Internet companies to collect sales tax if they make more than 200 sales, or perform $100,000 in transactions, with South Dakota in a year. Online retailers Wayfair Inc., Overstock.com Inc. and Newegg Inc. immediately sued, citing the Quill case. The Supreme Court agreed on Jan. 12 to hear the case.

Traditional retailers should not get too excited, though. The Court will likely overturn Quill, but do little more. Such a ruling will create legislative chaos.

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"If South Dakota gets upheld, every state in the country ... is going to pass a similar law to see what they can get. The revenue pressure is so acute," Boch said. "Sales and use taxes get rapidly complicated as you move away from discrete, basic sales of tangible personal property."

Members of Congress have introduced several bipartisan bills to establish a national standard for collecting and remitting sales taxes under the interstate commerce clause. Any of these measures would level the playing field and create a simplified, standardized remittance system. But like past years, none of the measures have gained traction.

Scalia was right, this is a matter for Congress, not the Court. Kennedy was also right, Quill was a decision for another era and needs to be overturned.

Online retailers should not profit from tax evasion, and if Congress cares about fairness for the nation's largest employers, they will act before the Supreme Court forces the issue.

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