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US Supreme Court hearings $13bn e-commerce Sales Tax

US Supreme Court hearings $13bn e-commerce Sales Tax

The US Supreme Court has started hearing arguments on the transformational South Dakota v Wayfair Inc decision to levy Sales Tax on out-of-state e-commerce merchants.  At stake is an estimated $13.4 billion in uncharged Sales Taxes.

The ruling could overturn the previous high court ruling in 1992 Quill that only resident retailers and online merchants, with a physical presence in the state, must charge a state’s local Sales Tax. If the Court upholds the South Dakota ruling, abolishing the exemption, it will open the way for all states to tax out-of-state retailers. A ruling is expected in June.

Quill v North Dakota exempts out-of-state retailers

At the time of the Quill Corp. v. North Dakota case, in 1992, the internet had not yet taken off. The US’ natural aversion to any taxes meant that the courts were resistant to subject out-of-state merchants to Sales Tax.

Since then, with the explosive growth of e-commerce, many out-of-state merchants have prospered with this no-Sales Tax subsidy at the expense of in-state online and bricks-and-mortar retailers. Additionally, the tax base of states has been undermined and their tax bases eroded. It has been estimated by the U.S. Accounting Office that states are now losing up to $13.4 billion per annum in Sales Taxes on trade by out-of-state businesses.

South Dakota challenges Sales Tax subsidy

Many states have limited income tax revenues, so are heavily dependent on Sales Tax. One, South Dakota, passed an ‘economic nexus' law in 2016 to bring out-of-state sellers into their Sales Tax net. The law sets two Sales Tax liability thresholds:

  • sales of $100,000 per annum; or
  • more than 200 unique sales.

Beyond these levels, a retailer would have to register with the state’s tax office, charge and remit Sales Tax.

The law was challenged by Wayfair and other retailers, and hearings started this week at the Supreme Court.

If South Dakota wins…

In anticipation of the hearings, many other states have issued similar laws based on South Dakota’s. In the case of a win for South Dakota, these states’ laws will automatically enter into force. However, depending on the details of the Supreme Court ruling, they may require some changes.

Congress could challenge a South Dakota win and attempt to change federal laws to reverse the ruling.

If Wayfair wins…

Should Wayfair win the case, then the situation would not be resolved. Several other states would likely raise challenges to Quill. These could be Wyoming, Indiana, or Tennessee.

Other states have been moving forward with marketplace facilitor laws which require marketplaces to levy taxes on their behalf.

Congress action to close Sales Tax loophole

The US Congress has also moved to equalise the Sales Tax liabilities. It put forward the Marketplace Fairness Act in 2013 to give states the power to tax out-of-state merchants. However, this, and other similar acts, have made no progress due to resistance from politicians to increasing taxes.

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VP Global Indirect Tax
Richard Asquith
VP Global Indirect Tax Richard Asquith
Richard Asquith is VP Global Indirect Tax at Avalara, helping businesses understand their compliance obligations as they grow globally. He is part of the European leadership team which this year won International Tax Review's Tax Technology Firm of the Year. Richard qualified as an accountant with KPMG in the UK, and went on to work in Hungary, Russia and France with EY.