Lawsuit Could Prompt Supreme Court to Revisit Taxation of Electronic Commerce

The state of Minnesota, as well as 35 cities and more than 35 counties with local sales taxes, could be impacted by South Dakota case.
(Published Sep 25, 2017)

The South Dakota Supreme Court recently overturned a 2016 South Dakota law that would have expanded sales tax collection responsibility to a broader array of retailers, including retailers without a physical presence in the state. The decision was not unexpected.

Now, government officials in South Dakota and other states are hopeful the case will be successfully appealed and ultimately reach the U.S. Supreme Court. Review of the case would allow the Supreme Court to take a new look at the issue of sales tax collection from online retailers that do not have a physical presence in the state—a growing nexus of commerce that has operated free from sales tax collection due to a 1992 Supreme Court decision.

In that 1992 case (Quill Corp. v. North Dakota), the court ruled that a business must have a physical presence in a state for that state to be able to require the collection of sales taxes. North Dakota had attempted to require non-resident businesses to collect its sales tax, but the court found that the requirement violated the Commerce Clause of the U.S. Constitution.

Seeking federal legislation
In the Quill decision, the U.S. Supreme Court suggested Congress could overrule the decision through legislation. Since that decision was released, a group of states, including Minnesota, have been working together to simplify the administration of the sales tax through a joint effort known as the “streamlined sales tax project.” Participating states developed standardized and simplified rules for the administration of state and local sales taxes through uniform definitions of tax base, simplified tax rates, and state level administration of state and local sales taxes.

Despite several bipartisan efforts to address the issue in the legislative arena, Congress has not enacted legislation, and states continue to experience an erosion of sales tax collections. According to a 2014 report by the National Conference of State Legislatures, Minnesota lost more than $455 million in revenue in 2012 due to the growth in untaxed electronic commerce.

New strategy
Due to this growing revenue loss, a number of states have adopted a new strategy to return the issue to the U.S. Supreme Court. South Dakota, Minnesota, and other states have enacted legislation that again attempts to expand the collection responsibility to a wider array of retailers. Minnesota’s effort was finally enacted in the 2017 omnibus tax bill, but the South Dakota law is the first to be challenged and is now poised to potentially reach the U.S. Supreme Court. Court review will require four of the nine justices to agree to hear the case.

The League of Minnesota Cities’ existing legislative policies and pending 2018 policies include language supporting both congressional efforts to modify federal law to address the Quill decision as well as efforts by the states to return the issue to the U.S. Supreme Court for review.

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