South Dakota pleaded with the Supreme Court on Tuesday to overturn previous precedent and allow it to force online retailers to collect sales tax from customers within state borders.
Currently only online retailers who also have a physical presence such as a store or sales force inside the state are required to collect sales taxes from internet purchases.
But local stores say they’re losing business to online retailers who don’t have to pay the tax, and some states say they’re losing cash that could help bolster their own budgets.
Most of the justices hearing the case Tuesday appeared sympathetic to the complaints — though they struggled to figure out how far they could go in expanding online taxation.
“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. And that seems to make your bar higher to surmount, isn’t it?” Justice Elena Kagan told South Dakota.
South Dakota Attorney General Marty J. Jackley said he hoped the court’s attention would change that: “Sometimes the activity of this Court will spur Congress to act.”
The high court created the current compromise in a 1992 decision dealing with mail-order catalogs, ruling that if retailers have a physical presence in a state they should pay taxes on sales there. But if the retailers have no presence, a state can’t force an out-of-state entity to collect taxes.
Mr. Jackley said that ruling is obsolete with the rise of the internet.
According to the U.S. Census Bureau, retail e-commerce sales during the fourth quarter of 2017 reached $119 billion — a 16.9 percent increase in e-commerce compared to the fourth quarter of 2016.
South Dakota’s law would require retailers that make more than $100,000 in revenue or have more than 200 transactions with in-state consumers to collect a sales tax for the state, no matter where the company is located.
South Dakota said given the advance of software, it’s easy to calculate sales tax, removing barriers to online retailers’ compliance.
But Wayfair, Overstock.com and the other online retailers who are parties to the case, said Congress should be the one to regulate any changes in how they do business and that software and technological advances are not the answer because it would be too costly.
George S. Isaacson, who represented the online retailers, said states also require physical forms and paperwork that must be collected.
“There’s no software solution to that,” said Mr. Isaacson.
The wisdom of the court setting a national policy divided the court.
Justice Stephen G. Breyer pointed to briefs from lawmakers who said they shelved plans to tackle online sales taxes once they saw the high court was dealing with the matter — suggesting the courts were treading where Congress could act.
Justice Neil M. Gorsuch, though, questioned why the court should favor one business model over another in allowing some online retailers to escape paying local sales taxes.
“Brick-and-mortar retailers, if they choose to operate in any given jurisdiction, have to comply with that jurisdiction. There are a lot of retailers that have to comply with lots of different jurisdictions’ rules,” he said.
Mr. Issacson, though, said states must have the chance to control operations within their borders.
“It’s a key part of horizontal federalism in this country,” he said. “So, if there’s going to be some standard that determines when is a company subject to the tax jurisdiction of a state, using the territorial limits of that state make sense.”
• Alex Swoyer can be reached at aswoyer@washingtontimes.com.
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