If Supreme Court Rules in Favor of Online Sales Taxes, Government Needs a Better Way to Collect

If the U.S. Supreme Court ultimately rules states can collect sales taxes on Internet-based transactions regardless of where the e-retailer is based, CIOs don't want to leave money on the table.

by / April 18, 2018

State and city organization representatives expressed optimism that the U.S. Supreme Court would ultimately give the green light for states to collect and remit sales taxes on Internet-based transactions, following oral arguments Tuesday before the nation’s highest court.

Those representatives expect the Supreme Court to rule on the South Dakota v. Wayfair case by the end of June. And if it approves collection of taxes on Internet sales, it could mean billions of dollars going to state and local governments. But state and municipal CIOs may want to take steps to avoid leaving big money on the table if the high court approves collection of taxes for online sales.

"The fact that the court accepted the case in the first place leaves us somewhat optimistic that the 'physical presence' test from Quill may finally be overturned," Brian Egan, principal associate for finance, administration and intergovernmental relations at the National League of Cities, told Government Technology.

Under the 1992 Quill v. North Dakota decision, the Supreme Court reaffirmed that states and local governments could only charge sales tax if a company had a physical presence in the state.

Since the Quill decision, Egan says online retail has grown to account for an increasingly large share of sales, which puts brick-and-mortar stores on Main Street at a disadvantage. 

"This is not about adding a new tax — this is about closing a tax loophole that costs state and local governments upwards of $23 billion per year. Needless to say, we welcome the court’s interest in hearing the case and remain hopeful," Egan says.

Lisa Soronen, executive director of the State and Local Legal Center, and Max Behlke, director of budget and tax for the National Conference of State Legislatures, also expressed optimism Quill will be overturned, noting four Supreme Court justices seemed favorable to overturning Quill and that only five votes are needed to make a ruling.

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State and local sales tax rates, as well as the way items are defined for tax purposes, varies greatly based on jurisdiction. As a result, opponents of online sales taxes argue it may be difficult to collect these types of taxes. That, in turn, could mean money on the table for state and local governments.

However, 24 states have joined the Streamlined Sales Tax Governing Board, which administers a multistate agreement that aims to reduce the complexities of collecting and remitting sales taxes. Under the board’s Streamlined Sales and Use Tax Agreement, Behlke says, automatic money collection shrinks the burden.

The board has certified seven service providers who work with its members to handle the collection and remittance of sales taxes for e-commerce retailers. The remote retailers who have signed up for the service with one of the member states do not have to pay the certified service providers to collect and remit online sales taxes if the transaction occurred in the member state, since the board pays for those costs on behalf of the remote retailer, Craig Johnson, executive director of the Streamlined Sales Tax Governing Board, said.

He added he expects more states will be interested in joining the organization and using the certified service providers should the Supreme Court overturn the Quill ruling. 

"More than 20 states have already joined the Streamline Sales and Use Tax Agreement, which has produced simplified and standardized methods of collection. Cities should continue to work with their states and continue to advocate for a solution that closes this costly loophole," Egan said.

Dawn Kawamoto Former Staff Writer

Dawn Kawamoto is a former staff writer for Government Technology.

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