Internet retailers face looming duty to collect out-of-state tax

Online shopping is hugely popular but not with state governments. For years, states have complained the internet shopping boom is costing them billions in tax revenue thanks to a long-standing law that prevents them from taxing distant retailers.

That’s set to change after a Tuesday Supreme Court decision that opens the door wide for states to expand their tax collection powers, and that will likely affect Amazon as well as smaller internet retailers.

In the ruling, Justice Anthony Kennedy said that the growth of the internet means it’s time for the top court to revisit a 1992 decision called Quill, which held that states can’t force a business to collect tax in a given state unless it has a physical presence there.

The Quill case, which was about mail-order catalogues, ensured that businesses didn’t have to worry about collecting and remitting taxes to dozens of different governments every time they made a distant shipment.

At the time, the decision was uncontroversial, presumably because people didn’t whip out a mail-order catalogue every time they fancied a purchase. That’s not the case today, however, since online purchases are so easy. On Tuesday, Justice Kennedy noted this trend and its impact on state coffers:

When the Court decided Quill, mail-order sales in the United States totaled $180 billion. … But in 1992, the Internet was in its infancy. By 2008, e-commerce sales alone totaled $3.16 trillion per year in the United States … Colorado’s losses in 2012 are estimated to be around $170 million. States’ education systems, healthcare services, and infrastructure are weakened as a result. […]

Given these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court’s holding in Quill. A case questionable even when decided, Quill now harms States to a degree far greater than could have been anticipated earlier

The ruling also comes at a time when main street retailers are increasingly upset at online competitors who, they say, offer lower prices since they don’t have to charge tax. Those retailers have been pushing the Marketplace Fairness Act, a bipartisan bill that would eliminate Quill as an obstacle for out-of-state tax collection, but one that has repeatedly failed to pass Congress.

But now the Supreme Court decision could make the Marketplace Fairness Act unnecessary. Instead, state governments may now be emboldened to simply write new tax collection laws, and then rely on Kennedy’s words if they are challenged in court.

The outcome is hardly a sure thing, of course, especially since Tuesday’s case was about a wonky procedural issue, and not about tax collection directly. (Kennedy’s words will instead lay the table for any state or group that aspires to challenge the Quill ruling head-on).

Meanwhile, those who oppose expanding out-of-state tax collection powers are unlikely to give up the fight. These opponents include the five states (Oregon, Delaware, Alaska, Montana and New Hampshire) that have no sales tax in the first place, and whose political leaders will argue it’s unfair for their businesses to have to carry out tax collection on behalf of others. The business community, led by the Wall Street Journal (paywall), have also opposed expanding out-of-state tax collection on the grounds that it could force retailers to deal with red tape in the forms of hundreds of city, state, country and Native American tax authorities.

(To get a deeper flavor of the legal issues at play, see Adam Liptak in the New York Times or Harvard Law professor Noah Feldman, writing at Bloomberg View)