From Quill to Wayfair, Midwest’s states at center of legal questions over collection of taxes from remote sales
In 2017, because they lacked the authority to require the collection of sales taxes on remote sales, states and local governments lost up to $13 billion. With one Midwestern state leading the way, this legal and fiscal landscape could change soon, depending on how the U.S. Supreme Court rules in South Dakota v. Wayfair.
For now, a 1992 decision, Quill Corp. v. North Dakota, is the law of the land. It says that, minus congressional action, a state can only require businesses with a substantial presence, or nexus, to collect and remit the sales tax. That ruling has affected not only state tax bases, but the competitiveness of Main Street businesses as well — particularly with the rise of electronic commerce (see line graph).
Four years ago, The Council of State Governments, in partnership with the State and Local Legal Center and members of the Big Seven organizations representing state and local governments, filed an amicus brief critiquing Quill, which prompted Justice Anthony Kennedy to ask for a case to overturn the ruling.
“If the Supreme Court wanted to leave the Quill rule in place, it probably would have simply refused to hear South Dakota v. Wayfair,” says Lisa Soronen, the center’s executive director. Justices heard oral arguments in the case in April.
If states do get this expanded authority, it’s unclear exactly how much more they will collect in sales taxes; studies trying to estimate the impact have reached very different conclusions. Late last year, the U.S. Government Accountability Office pegged the increase as being somewhere between $8 billion and $13 billion a year (see table for state-specific figures for Midwest); that equates to between 2 percent and 4 percent of total state and local revenue collected via the sales tax.
While the rise of internet sales since Quill is well known, the work of states in creating a simpler, more uniform system of sales tax collection has received less attention.
But for nearly two decades, states have worked with one another and businesses on developing, implementing and fine-tuning the Streamlined Sales Tax Agreement. Twenty-three U.S. states (including all but Illinois in the Midwest) are currently full members of this agreement, which took effect in 2005.
“It represents a thoughtful, carefully worked-out compromise where all the parties involved looked at the undue burdens [related to sales tax collection], worked with the business community to identify them, and then found solutions,” says Craig Johnson, executive director of the Streamlined Sales Tax Governing Board.
Does requiring remote sellers to collect sales taxes place an undue burden on interstate commerce?
That is a fundamental question before the Supreme Court, and in his argument for overturning Quill, South Dakota Attorney General Marty Jackley points to the Streamlined Sales Tax Agreement — and his state’s membership in it — as evidence of today’s more uniform, simpler compliance system.
In Wayfair, the court will determine the constitutionality of South Dakota’s SB 106. Passed two years ago, it requires most retailers without a physical presence in the state to remit the state’s sales tax. The law applies to sellers with 200 or more annual transactions in South Dakota or whose gross revenue from
sales in the state exceed $100,000.
|Stateline Midwest: May 2018||2.4 MB|