Taxing Question

• Author: Mark Walsh
• Pages: 20-21

Supreme

Court

Report

Taxing Question

The high court weighs whether internet retailers must collect state sales taxes

By Mark Walsh

About a quarter century ago, those seeking o ce supplies probably had a

variety of possible sources, but buying on the internet wasn’t yet one of them.

Amazon.com was two years away from being founded, and brick-and-mortar

chains such as Staples and O ce Depot were in their infancy.

The average consumer in a state such as North Dakota could turn to an old-school catalog

retailer. The Quill Corp., a national retailer founded in 1956, provided a catalog with multiple

choices in o ce equipment and supplies. It had about 3,000 customers in North Dakota

who got an extra benefi t from ordering: The catalog company did not collect the state sales

or use tax.

In a challenge by the state, the U.S. Supreme Court soon agreed with the retailer. In

Quill Corp. v. North Dakota, the justices ruled in 1992 that the state’s enforcement of a

use tax against Quill placed an unconstitutional burden on interstate commerce.

The decision had enormous consequences that

were not necessarily fores een at the time. Now, in a

new case brought by North Dakota’s southern neighbor,

the high court may be poised t o overrule the 26-year-old

precedent. In South Dakota v. Wayfair, set for arg ument

on April 17, the justices will consider whether t o overrule

Quill and uphold a law that requires most out-of-stat e

internet retailer s to collect sales tax.

The court in Quill stood by a n earlier decision about

taxation of out-of-state s ales, National Bellas Hess v.

Department of Re venue in 1967, which imposed a

“physical presence test ” requiring sellers to have a phy-

sical nexus to the st ate, such as an o ce or a wa rehouse.

In 1992, the court questioned the va lidity of the physi-

cal presence test be cause of intervening rulings but stuck

with the Bellas Hes s rule as a matter of stare decisis , as

well as the idea that mail- order retailers faced di culties

in complying with ta x obligations from about 6,000

separate state and loc al taxing jurisdictions nat ionwide.

The retail landsc ape would soon change dramatically,

of course. Amaz on was founded in 1994 and e-commerce

took o , fueled in part by the e ective discount c onsum-

ers received by not having to pay sale s tax

on most purchases. The advent of

smartphones booste d web commerce

to higher levels to the point where

brick-and-mortar stores fa ce an

uncertain future.

“The way commerce was conducte d in 1992 compared

with 2018, there’s just nothing in common,” says Oren

Teicher, CEO of the American Booksellers Assoc iation.

“Everything ha s been turned on its head.”

AN INVITATION FROM A JUSTICE

The states, meanwhile, h ave been losing out on billions

in sales tax revenue over the yea rs (one estimate cite d

in court papers sugge sts they’ll lose about $34 billion

this year). This comes as some big internet reta ilers

have begun collecti ng sales tax regardless of whether

they have a physical presence in the buyer’s state .

Amazon, which incre asingly has a physical presence

across the countr y through warehouses, its purchase

of Whole Foods and its bookstores, c ollects sales tax

on items it sells, although not on items sold by its

a liated sellers.

The states, along with some bric k-and-mortar re tailers

and mom-and-pop stores that have been on the losing

end of Quill, have urged Congress t o come to their res-

cue. But federal lawmakers have not ac ted, partly to

maintain the gr owth of e-commerce and

partly out of a fear any a ction they

took would be perceived as a ta x

increase.

In 2015, however, the states

got a boost from

20 || ABA JOURNAL APRIL 2018

The Docket