Georgia Enacts Online Sales Tax Law Ahead of Supreme Court Action

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By Chris Marr

Georgia is set to require online retailers to either collect sales tax or report their sales to the revenue department, but the U.S. Supreme Court could block such collection requirements before they take effect.

Either way, the requirements might put Georgia in line for a lawsuit of its own before its law is due to take effect Jan. 1, 2019.

Through the enactment of H.B. 61, the state has joined a handful of others imposing sales tax collection requirements based on a seller’s volume of sales. The new Georgia law, which Gov. Nathan Deal (R) signed May 3, applies to companies that sell goods worth more than $250,000 or complete at least 200 separate transactions into the state. It requires them to collect sales tax or else notify customers of their tax obligations and report sales to the Department of Revenue.

The law directly defies the legal precedent that states can only require sales tax collection by companies with an in-state physical presence. It is similar to laws or revenue department rules passed in Alabama, South Dakota, and Tennessee, among others.

The U.S. Supreme Court is expected to rule on the constitutionality of such laws before the end of June, as it considers a legal challenge to South Dakota’s 2016 law in South Dakota v. Wayfair. Like a handful of other states, South Dakota enacted its law with the goal of seeding a case that could upend the physical presence standard established in 1992 by the Supreme Court in Quill Corp. v. North Dakota.

If the Supreme Court upholds the physical presence standard, Georgia’s “collection requirement would remain constitutionally unenforceable, but dealers meeting either of the thresholds would be subject to the notice and reporting requirements,” said Jonathan Feldman, a tax attorney at Eversheds Sutherland (US) LLP in Atlanta.

On the other hand, if the court sides with South Dakota and strikes down the physical presence rule, a future Georgia Legislature might consider rewriting the law to remove the reporting and notification option, Feldman told Bloomberg Tax May 7.

Industry Litigation

The states argue the physical presence standard is outdated in the era of e-commerce, where a growing share of sales takes place over the internet involving out-of-state companies. Supporters in the Georgia Legislature also argued small businesses based in Georgia face an unfair disadvantage when online retailers don’t collect sales tax.

But the e-commerce and catalog industries oppose such legislation, pointing to constitutional protections for interstate commerce and the burdens of complying with potentially hundreds or thousands of varying local and state sales tax rules around the U.S.

“I think Georgia can fully expect a lawsuit before the law takes effect in January,” particularly if the Supreme Court upholds the physical presence rule and finds South Dakota’s law unconstitutional, said Steve DelBianco, president and CEO of NetChoice, an industry association for e-commerce.

NetChoice has sued Indiana, Tennessee, and Wyoming over similar sales tax collection laws.

Georgia also could face a legal challenge on the reporting requirements, DelBianco told Bloomberg Tax May 7, in addition to public opposition when residents of the state become aware of the privacy concerns of their online purchases being reported to the state.

The reporting requirements in Georgia’s law are modeled after a Colorado law that faced six years of court challenges before the Supreme Court declined to review the U.S. Court of Appeals for the Tenth Circuit’s decision to uphold Colorado’s law. No other federal circuit has ruled on such a reporting law, DelBianco said.

“Georgia is not in the Tenth Circuit. You can bet that it’s a ripe target,” he said.

Analytics for Sales Tax Enforcement

Georgia also enacted a handful of other tax bills shortly before the governor’s May 8 deadline for signing or vetoing bills.

Among them, H.B. 811 lets the state revenue department hire data analytics firms on a contingent-fee basis to help identify potential sales tax fraud and noncompliance.

Business-focused tax advocacy group the Council On State Taxation had opposed the bill on the grounds that a contingent-fee model gives third-party service providers an incentive to flag as many taxpayers as possible for audits.

But the bill’s sponsor argued it was necessary to address potentially widespread fraud and noncompliance in sales tax remittance that he said could be worth almost $1 billion to the state.

School Donations, Data Centers

Other tax bills that Deal signed into law include:

  • H.B. 217, which increases the statewide cap on Georgia’s Private School Tax Credit program to $100 million annually for the next 10 years, up from the current annual cap of $58 million.
  • H.B. 696, which provides a sales tax exemption for purchases of equipment in the construction of data centers that invest at least $250 million, or a minimum of $100 million in small rural counties. The tax break’s enactment comes after the governor’s office announced earlier this year Facebook plans to spend up to $750 million building a data center east of Atlanta.
  • H.B. 329, which revises the title ad valorem tax paid on automobile purchases, including changes to how the tax is applied to vehicle leases and how the state divides the tax revenue with local governments.

To contact the reporter on this story: Chris Marr in Atlanta at cmarr@bloomberglaw.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

For More Information

Text of H.B. 61 is at http://src.bna.com/xoB.

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