Online Sales Tax Lawsuits in Limbo After High Court Ruling

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Ryan Prete

Electronic retailers suing states in the hopes of avoiding online sales tax on out-of-state purchases are facing significant obstacles.

The main one is the U.S. Supreme Court’s June 21 ruling in South Dakota v. Wayfair that threw out its divisive 1992 rule in Quill Corp. v. North Dakota. Quill, which states like the petitioning South Dakota for years have tried to “kill” through lawsuits and regulation, prohibited states from imposing sales tax collection obligations on vendors lacking an in-state physical presence.

However, a major player in the Wayfair case—Overstock.com Inc.—announced in a June 25 press release that it had “started the process to collect sales tax on purchases made by consumers from the more than 12,000 unique U.S. tax jurisdictions following” the high court ruling.

Overstock is involved in at least one pending lawsuit that concerns state sales tax regimes, so the question is will the e-retailer remain in the case or seek further lawsuits? And the South Dakota Supreme Court technically still has to resolve whether the state law passes constitutional muster. The U.S. Supreme Court in Wayfair only suggested it would, but remanded the matter for the state court to decide.

Overstock didn’t immediately respond to requests for comment, and lawyers involved in similar cases have remained relatively quiet.

There are six states with pending or recently settled litigation similar to the South Dakota underlying lawsuit. Parties in two of the cases say the Wayfair ruling basically ends their disputes, while the other four are still weighing the decision or aren’t commenting on next steps.

A representative at the American Catalog Mailers Association (ACMA)—a group that has launched multiple lawsuits against states—said he couldn’t comment on pending litigation.

Matthew Schaefer of Brann & Isaacson, a lawyer who has represented multiple e-retailers and the ACMA, told Bloomberg Tax that the law firm was continuing to analyze the impact of the Wayfair decision on pending litigation.

Wayfair declined to comment on Overstock’s announcement.

Pending Litigation Update

Meanwhile, the South Dakota Department of Revenue said it expects the South Dakota Supreme Court to issue a decision on remand in August.

“The Department of Revenue expects that the U.S. Supreme Court will formally send its decision to the South Dakota Supreme Court in mid-July. The case will return to the State Circuit Court with the possibility for an August decision,” according to a June 26 press release.

Department of Revenue Secretary Andy Gerlach said that “While it may take several months for litigation to conclude, we will continue to communicate with our current and future taxpayers on implementation.”

In Alabama, after a pre-Wayfair loss to e-retailer Newegg over the state’s online tax regulation, Joe W. Garrett Jr., deputy commissioner for the Alabama Department of Revenue, told Bloomberg Tax in an email that the state was moving on.

“We could ask for a rehearing based on Wayfair. Which we should be granted in my opinion. We are still within the time period. But I don’t anticipate that. We are moving on,” Garrett said.

The impact of Wayfair in the meantime was unclear in most of the other states with still-pending legal actions.

in Tennesee, Brett R. Carter, a partner with Carter Shelton PLC in Nashville, told Bloomberg Tax June 26 that the assumption is that Wayfair disposes of the litigation pending in the state brought by the online retailers unless the plaintiffs decide to argue the state’s regulation represents an undue burden on commerce. He said there also is a secondary argument that the regulation was invalid and isn’t grounded in statute.

Carter said that most observers expect that the state Department of Revenue will seek legislative authority to collect the tax “now that the political ramifications of the decision can be placed on the doorstep of the U.S. Supreme Court.” He added that all of the candidates for governor in the upcoming election have voiced support for the collection of online sales taxes based on Wayfair.

Therefore, Carter told Bloomberg Tax that regulatory efforts and litigation “likely become moot” pending legislative consideration early in 2019 over an economic nexus standard in Tennessee, which he said is likely to be accompanied by certain tax cuts.

Hamilton Davison, president and executive director of the ACMA, told Bloomberg Tax June 26 that his group was “reviewing all our litigation and legislative strategy” after the Wayfair ruling.

Kelly Cortesi, a spokeswoman for the Tennessee Department of Revenue, deferred comment to the state attorney general’s office whose representatives didn’t immediately respond to a request for comment.

In Ohio, Gary Gudmundson, communications director at the Ohio Department of Taxation, said that the Wayfair ruling doesn’t affect their suit with the ACMA because the state has maintained that its law relied upon the physical presence of sellers in-state.

The “decision does not have an immediate, direct impact on Ohio,” Gudmundson said. “The Court ruled on the laws in another state; not on Ohio’s tax laws. We anticipate that we’ll see some out-of-state retailers begin to voluntary charge and collect Ohio sales tax, but otherwise the sales tax rules and laws in Ohio will stay the same until the General Assembly decides whether or not to change them.”

In a brief filed April 3, the Ohio Attorney General reasserted arguments pushing dismissal of an ACMA lawsuit challenging Ohio’s new “cookie-style” regime requiring collection and remittance of use tax by some remote sellers.

The challenged Ohio law, placed in the 2018-19 state biennial budget bill, works by broadening Ohio’s statutory definition of “substantial nexus.” It extends sales tax to companies selling $500,000 of goods in Ohio and who place “in-state software” on Ohio computers and phones or have servers located in Ohio.

The ACMA declined to comment on the case.

In Indiana, a case also involving the ACMA was stayed in May. The ACMA declined to comment on that case as well, and the Indiana Department of Revenue didn’t immediately respond to request for comment.

In Virginia, Crutchfield Corp., a consumer electronics and automotive parts retailer, is challenging a Massachusetts regulation that incorporated a cookie-nexus standard, among other provisions. The state Department of Revenue filed in December 2017 a motion to dismiss for lack of personal jurisdiction and filed its supporting memorandum in mid-February. The motion hasn’t been scheduled for a hearing.

Brann & Isaacson, the law firm representing Crutchfield, didn’t have further comment beyond Schaefer’s statement that the firm was analyzing Wayfair’s impact.

In Wyoming, a law (H.B. 19) requiring remote sellers to collect and remit sales taxes isn’t being enforced while a court case is pending. Mirroring South Dakota’s statute, H.B. 19 requires remote retailers to collect and remit sales taxes if they have more than $100,000 in aggregate transactions or more than 200 transactions with Wyoming consumers.

While the state is suing Newegg, Overstock, and Wayfair for failing to comply with the law, NetChoice and the ACMA are suing the state over the constitutionality of H.B. 19.

Wyoming Attorney General Peter Michael (R), who is representing the state in the case, didn’t immediately respond to a request for comment.

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