Expect Tax Overhaul if South Dakota Loses E-Retail Litigation

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By Che Odom

Expect states to overhaul their tax systems if South Dakota is unsuccessful in challenging a 1992 Supreme Court opinion that restricts the ability of states to collect sales tax from remote e-retailers.

State lawmakers are already considering the option of taxing the gross revenue of companies to get around the high court’s strictures.

That’s according to Max Behlke, director of budget and tax policy for the National Conference of State Legislatures.

Behlke, speaking May 12 at an American Bar Association taxation section meeting in Washington, is a lobbyist and consultant to state lawmakers from around the country. Taxation of online out-of-state retailers has dominated his discussions with state officials over the last several months, he said.

Members of his organization agreed last year to take steps to challenge the Supreme Court’s opinion in Quill Corp. v. North Dakota if Congress didn’t act. Congress hasn’t acted, though a handful of bills have been in the works.

Several states, including Colorado, North Dakota and Alabama, have passed various tax collection or reporting laws aimed at undermining Quill, which limits the collection of sales and use tax to vendors with a physical presence in the state.

Under South Dakota’s statute, enacted and implemented earlier this year, out-of-state sellers with annual in-state sales exceeding $100,000 or 200 separate transactions must collect and remit sales tax.

Litigation over the statute is already underway.

Expedited Process

NetChoice and the American Catalog Mailers Association filed their lawsuit against the state two days before the law officially went into effect, but after South Dakota had started issuing demand notices.

This could be the first case to reach the Supreme Court, given that South Dakota’s legislation calls for an expedited process through the state courts.

“The Quill issue could be resolved or confirmed by June of next year,” because of the South Dakota challenge, Behlke said. If the court rules against South Dakota, “which I don’t believe will happen, expect gross receipts tax to come to a state near you.”

A gross receipts tax is similar to a sales tax, but is levied on the seller of the goods or services.

Economists tend to agree that gross receipts isn’t an ideal tax form, but states know they can collect it from e-retailers that lack a physical presence in the state, Behlke said.

Nationwide Campaign

South Dakota’s law joined a growing multistate effort to encourage litigation that rises to the U.S. Supreme Court, with the goal of overturning the 24 year-old decision in Quill.

Alabama spearheaded the charge, adopting in 2015 an economic presence model requiring remote vendors whose in-state sales annually exceed $250,000 to collect and remit sales and use tax. That has grown into a seemingly nationwide campaign to rework the Quill standard.

Critics argue that states’ justification for “kill Quill ” bills—namely revenue—doesn’t authorize long-arm authority that crosses state borders.

“I think that gets to the root of what we’re saying,” NetChoice Executive Director Steve DelBianco told reporters April 27. He said a state imposing rates, rules and audits “needs to be a regime where I have a physical presence allowing me to have some say in my state government and in my regulations.”

To contact the reporter on this story: Che Odom in Washington at codom@bna.com

To contact the editor responsible for this story: Cheryl Saenz at csaenz@bna.com

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