BLOOMINGTON, Ind. – The U.S. Supreme Court is expected to issue a decision soon in South Dakota v. Wayfair Inc., potentially making it easier for states to collect taxes on online sales.
South Dakota is asking the court to reverse a 1992 decision that found the Constitution’s commerce clause barred states from requiring retailers without a physical presence in the state to collect tax on sales to state residents. The following Indiana University experts are available to comment on the case.
‘Most significant’ case in 25 years
John L. Mikesell, Chancellor’s Professor Emeritus in the IU School of Public and Environmental Affairs, has spent his career studying sales and property tax policy as well as administration and public budgeting systems. He calls South Dakota v. Wayfair “the most significant Supreme Court case in state and local government finance in the last quarter century.”
Under the 1992 Quill Corp. v. North Dakota decision, he said, states have found it nearly impossible to collect sales taxes on online purchases from businesses that don’t have a physical presence in the state. If South Dakota prevails in the current case, that would change.
“If South Dakota is successful,” Mikesell said, “states may require vendors to collect the tax on the basis of economic – not necessarily physical – presence, and economic presence would be established by a significant volume of sales within the state. Some states already have laws that will take effect immediately on Supreme Court action, and others are likely to respond quickly.”
If Wayfair wins, he said, states will continue attempting to get vendors to collect and pay sales taxes, which is far more efficient than tracking down individual purchasers.
“States may also hope that Congress will change the rules for requiring collection,” he said, “but Congress has not acted in the years since Quill, and it is not clear that it would act quickly now.”
It is estimated that getting remote vendors into the sales tax system would increase the tax base by about 5 to 7 percent, Mikesell said, somewhat reducing pressure on state finances. It would also eliminate remote vendors’ competitive edge over local brick-and-mortar businesses.
“The retail sales tax yields around one-third of all state tax revenue nationally and around 49 percent of Indiana general fund revenue,” he said. “The financial viability of the tax in the new online economy is a matter of great concern for state fiscal sustainability, and the Wayfair case puts the tax clearly on the line.”
Mikesell can be reached at mikesell@indiana.edu or 812-855-1454.
Potential issues with retroactivity, commerce clause
Anjanette “Angie” Raymond, an associate professor of business law and ethics in the IU Kelley School of Business, said the court may be signaling an intention to revisit other issues related to online selling and other activities, in light of changes brought on by emerging information technologies.
Overturning the Quill ruling could lead to some problems, Raymond said.
“First, if the court overrules Quill, it may create a retroactive situation where taxes for already occurring sales are now due in the current tax period in states where there aren’t laws to address this issue,” she said. “Sellers would be faced with the question of whether to seek sales taxes from consumers or absorb those unexpected hits to their bottom line.
“There is also a real burden in collecting taxes, especially for businesses with limited online sales, in general, or only a few sales in a particular state,” she said.
Despite their desire to address issues related to growing online activity, the justices may still have questions about the commerce clause issue.
“Congress could in theory act and may choose to create a single sales tax for ‘remote’ sales,” Raymond said. “But the court can do nothing more than signal which option it thinks is best.”
If Congress takes up the issue, states undoubtedly will challenge a federal tax, Raymond predicts.
“States would presumably see different taxation rates for remote sellers as a potential advantage and argue it violates federalism for the federal government to step into a state-based area,” she said. “Regardless of what the court does, states may seek to legislate in this area based on the decision, and Congress may act. This will create a potential new question for the court, that being what entity has authority to take up the issue.”
Raymond can be reached at angraymo@indiana.edu, 812-855-3449 (office) or 812-320-0707 (mobile).
