The Supreme Court will hear a case out of South Dakota that could undo its much-criticized 1992 ruling on e-commerce sales taxing.
The 1992 ruling, Quill Corp v. North Dakota, said that states could not collect sales taxes on interstate commerce, which includes virtually all e-commerce, according to FastCompany. Since then, internet businesses have used that ruling to avoid charging state and local taxes, and shoppers have been able to bypass state taxes by going online.
However, the case of South Dakota v. Wayfair, Inc may upend that ruling. Wayfair, Inc is an online retailer battling South Dakota’s 2016 law which mandates that retailers that earn more than $100,000 annually must pay the state’s 4.5 percent sales tax. Joining Wayfair are Overstock.com and Newegg, Inc, according to Bloomberg.
The major internet retailer Amazon will also be affected by the bill, but not directly. Amazon pays state sales taxes on in-house merchandise, but third-party merchants may not. If the Supreme Court upends the 1992 decision, they may have to.
Failing to tax e-commerce has lost states up to $13 billion in potential revenue, according to the Government Accountability Office. Other estimates say the loss is even greater than that, according to Bloomberg.
South Dakota filed suit in an effort to overturn the Quill ruling, arguing in its case that “states’ inability to effectively collect sales tax from internet sellers imposes crushing harm on state treasuries and brick-and-mortar retailers alike,” according to The Verge.
In an op-ed published in The Washington Post, Larry Davidsons, a Virginia business owner, argues that the 1992 ruling made the sales tax unfair to brick-and-mortar stores by punishing them with a tax that online merchants could skip, enabling them to create a two-sided marketplace to take customers away from physical retail businesses.
However, critics say the tax would pose an “unreasonable tax burden” on online businesses. Steve DelBianco, who serves as president of NetChoice, an e-commerce trade organization, said states are imposing unreasonable burdens on out-of-state businesses, according to Reuters. Others argue that consumers will be hit in the wallet by the move.
In 2015, Justice Anthony Kennedy wrote a concurring opinion stating that the Supreme Court should not “delay any longer a reconsideration of the court’s holding in Quill,” according to Reuters.