On April 17, the U.S. Supreme Court heard oral arguments in the case of South Dakota v. Wayfair, Overstock, and Newegg. The case addresses online retailers’ obligation to collect and remit sales tax and what constitutes a business’ physical presence in a state. Retail trade associations, including the American Booksellers Association, believe the current law needs to be updated to accommodate retail in the 21st century.
The case revisits the 1992 Quill v. North Dakota decision, which prevents states from collecting taxes from companies that do not have a “physical presence” in that state. While the ruling was made before the explosive growth of e-commerce, Quill opened a loophole for online retailers that has resulted in a massive loss of sales tax revenue for states, which has, in turn, affected available resources for schools, first responders, and infrastructure. A Government Accountability Office report estimates this loss of state and local tax to be as high as $13 billion in 2017.
In an effort to remedy this loophole, South Dakota passed a law in 2016 requiring retailers with more than $100,000 in sales or more than 200 sales in the state per year to remit tax on those sales. When the state filed suit, the Supreme Court of the State of South Dakota found that the state cannot force remote retailers to collect and remit sales tax if they do not have nexus in South Dakota, that is, if they do not have a physical location in the state. South Dakota Attorney General Marty Jackley appealed the decision to the U.S. Supreme Court.
Despite Justice Anthony Kennedy inviting a reconsideration of Quill in 2015, it appeared during oral testimony that many of the other justices on the court did not share his belief that the 1992 Supreme Court decision should be updated. In its coverage of the oral arguments, USA Today predicted that the votes are not there to overturn Quill, a disheartening prospect for bricks-and-mortar stores that have been fighting for a level playing field since 1999.
During the testimony, Justice Sonia Sotomayor expressed concern that overturning Quill would result in burdensome costs for small business. Attorney General Jackley argued that the current status quo is what is bad for small business. “The small businesses are the ones that are affected most by Quill,” he said. “If you look at that small business on Main Street, it is that business that is put at a price disadvantage because of Quill.”
Sotomayor argued against this reasoning, however, and stressed that Main Street is at a disadvantage not by Quill but “by the fact that there are massive discount sellers, not just on the Internet, but even in stores now.” She also worried that sales tax collection software implementation would be very costly for small businesses (though the South Dakota law has a minimum sales requirement of $100,000 per year that would preclude small businesses from collecting and remitting sales tax).
Additionally, Justice Elena Kagan stressed that revisiting Quill should be the work of Congress and not of the Supreme Court. “When Congress has not addressed an issue for 25-plus years,” she said, “it gives us reason to pause, because Congress could have addressed the issue and Congress chose not to. This is not the kind of issue where you say: Well, it probably didn’t get on Congress’ radar screen or maybe Congress was too busy doing other things. This is a very prominent issue which Congress has been aware of for a very long time and has chosen not to do something about that.”
Speaking on behalf of Wayfair and in opposition to overturning Quill, lawyer George Isaacson argued that overturning Quill would be a mistake because “companies have ordered their economic affairs” around the nexus standard and what is required in terms of sales tax collection.
However, Justice John Roberts questioned this reasoning: “So, you’re saying they’ve made business decisions on the basis of an erroneous decision …. That use taxes are not being paid.” He added: “In other words, the benefit comes … from the fact that most people aren’t paying use taxes.”
Last November, ABA filed an amicus brief in support of sales tax fairness alongside groups including attorneys general, legislators, economists, and retailers. ABA pointed to “the notorious practice of ‘showrooming,’ where a customer browses in a bricks-and-mortar store, then buys products online using a smartphone in order to avoid paying sales tax,” as one consequence of Quill that particularly harms independent booksellers. ABA asked the court to “overrule this unfair rule and ensure that ordinary market forces—not government-imposed tax arbitrage—determines who wins and who loses in the bookselling market.” In January, the Supreme Court announced that it would review the case.
During questioning, Justice Roberts attempted to minimize the need to update Quill because Amazon was collecting in every state. But a report published this month by ABA and Civic Economics, Prime Numbers: Amazon and American Communities, demonstrates this is far from the case. There has been a significant and growing loss of employment and sales tax as Amazon’s Marketplace for third-party sales becomes increasingly dominant.
Civic Economics estimates that Amazon’s total retail sales in the U.S. in 2016 (the most recent figures available), including third-party merchants, exceeded $130 billion. Those sales represent 44,000 empty storefronts and 637,000 displaced retail workers, only minimally offset by Amazon’s employment in distribution facilities.
Marketplace sales grew from 46 percent of Amazon’s retail sales in the U.S. in 2014 to 56 percent in 2016, more than doubling in volume over the same period. Amazon’s direct sales grew at a much slower pace, resulting in a significant shift toward third-party sellers, which are currently left to their own discretion to decide whether and where to remit sales taxes.