Online Sales Tax Law Gets Its Day in Court
April 12, 2018
Can states collect sales taxes for remote online sales? Right now they can’t, but the question is at the heart of a case that will be heard in the U.S. Supreme Court next Tuesday and that many court watchers suspect will chip away at, if not eliminate, the current prohibition. And California’s counties, who receive a greater share of the sales tax than ever before due to realignments and other state funding decisions, will be watching the matter closely.
Under current law, states can only require retailers to collect sales taxes if the business has a physical presence in the state. That precedent was set in 1967 and mostly reaffirmed in a 1992 case usually just referred to as Quill (the full name is Quill Corp. v. North Dakota).
But, as with so many aspects of our lives, the internet has changed everything.
The case being heard next week, South Dakota v. Wayfair Inc., is the result of a South Dakota law that imposes sales tax collection duties based on a company’s economic presence rather than its physical presence. That law was passed after Justice Anthony Kennedy specifically called for the courts to find an opportunity to reexamine the Quill precedent in a concurring opinion in 2015.
For a fairly unbiased preview of the arguments both sides will be making next week, take a look at this SCOTUSblog post. Also of interest is this post from the Tax Foundation (not as unbiased) that attempts to work out which side the nine justices might fall on based on their previous rulings. Those interested in learning more about the history of the precedent and hearing an immediate reaction to oral arguments can register for a webinar produced by the State and Local Legal Center next Tuesday.
For counties in California, the case could mean a noticeable boost in revenue, as more retailers would be required to collect sales and use taxes. The growth of the use tax—what California calls the sales tax when the product comes from outside of the jurisdiction where it is purchased—has spiked over the past five years growing at 3.5 times the rate of brick-and-mortar sales, largely due to the increased share of internet sales.
Counties’ interest in the issue has increased significantly since Quill in 1992. Just before the ruling, the state had shifted a half-cent of the sales tax to counties along with increased funding responsibility for a variety of health and human service programs.
Just after the ruling, the Legislature shifted billions of dollars of general purpose property tax revenue from counties, cities, and special districts to schools (to benefit the state’s General Fund), and as a partial replacement put Proposition 172 on the ballot, providing another half-cent of sales tax revenue that is restricted to public safety purposes.
More recently, in 2011, the state shifted an even larger amount of sales tax revenue—1.0625 cents—to counties to pay for both public safety realignment and for another increase in funding responsibility for health and human service programs.
These changes were all on top of the long-standing Bradley-Burns tax, a penny of sales tax that is allocated to the city or county where a sale is made, and the “self-help” sales tax for transportation that 24 counties have successfully passed (about a third of which were implemented after 1992).
All of this together means that counties now receive, directly or indirectly, around half of the tax revenue generated from any given sale in the state.
And that is why counties will be paying attention to the oral arguments next Tuesday.