WASHINGTON — Frustrated with federal inaction and worried about declining revenue as more Americans shop online, states are eyeing a South Dakota court case that could allow them to collect more in sales taxes from online purchases.
Many states have laws that require online retailers to collect sales taxes if they have a store, warehouse or subsidiary in-state, or if they contract with a local business to advertise their products. The laws conform to a standard the U.S. Supreme Court established in its 1992 ruling in Quill Corp. v. North Dakota.
Online companies that don’t fall into any of those categories don’t collect sales taxes, and research suggests states are losing out on billions in revenue as online shopping grows. A 2012 estimate pegs the losses at $11 billion annually, according to research from the University of Tennessee and the National Conference of State Legislatures.
Online businesses have long contended that collecting taxes in the 45 states that tax retail sales would be too burdensome. But states say that argument is outdated because new software can calculate the tax and about half the states have adopted standardized sales tax rules.
South Dakota hopes a law it enacted this year will force the courts to take a second look. The measure requires any online business that sells more than $100,000 worth of goods in the state or processes more than 200 orders for South Dakotans to collect a sales tax.
South Dakota’s law goes beyond the Quill decision by stating that online businesses have a presence in the state simply because of the volume of sales they have there. South Dakota and other states are hopeful the U.S. Supreme Court will reconsider its Quill ruling based on that logic. They are pinning their hopes on Associate Justice Anthony Kennedy’s remarks in a Colorado case from last year. He said it may be time to reconsider Quill, calling it “questionable even when decided.”
“States have been frustrated by inaction from Congress but emboldened by Justice Kennedy,” said Joe Crosby with Multistate Associates, a lobbying firm that closely tracks state issues. He said states are eager to expand the concept of presence for tax collection purposes, and in South Dakota that means offering a test case.
NetChoice, an online retail group, and the American Catalog Mailers Association, whose members process many of their orders online, have sued South Dakota in a bid to overturn its new law.
South Dakota is likely to lose the case — at least initially — even in its own state Supreme Court, according to Michael Mazerov of the Center on Budget and Policy Priorities, a left-leaning think tank. But that’s the point, since the ultimate goal is to put the issue before the U.S. Supreme Court.
“The South Dakota law is clearly inconsistent with Quill, and it was intended to be,” Mazerov said. “The state Supreme Court may be reluctant to overturn on its own a U.S. Supreme Court decision.”