Last week, the Supreme Court met to consider reviewing a South Dakota law that requires retailers to collect South Dakota sales taxes, regardless of whether they are physically present in the Sunshine State. That law upends a quarter-century of precedent on sales taxes and puts consumers — especially customers of small, internet-based retailers — at risk.
Twenty-five years ago, in Quill v. North Dakota, the Supreme Court ruled that a state cannot require businesses to collect sales taxes for it unless those businesses have a physical nexus — such as a building, warehouse, or employees — in that state.
States tax authorities — 36 of which have urged the Supreme Court to take up the case — have long objected to Quill. Their view garnered unexpected support last summer from Treasury Secretary Steven Mnuchin, who said in testimony that the additional revenue from internet taxes “could be a very important means for the states to fund infrastructure.”
But any claimed need for new revenue from interstate taxation should be evaluated with the same skepticism as any other tax increase. If the Supreme Court reverses itself and allows states to force out-of-state retailers to collect more taxes, consumers’ will be stuck with the tab. That is a tax increase, regardless of how it is labeled.
Traditional brick-and-mortar retailers have a different concern. Under Quill, a local brick-and-mortar retailer and an internet retailer selling remotely to consumers from out of state could be treated differently. The first must add taxes to the sales price, while the latter is not required to do so. This puts the brick-and-mortar retailers at an artificial disadvantage, they argue.
Certainly, tax policy should treat like businesses alike. But the answer is not to impose taxes on retailers nationwide. That would just introduce a new disparity as remote sellers struggle to deal with the tax laws of some 10,000 jurisdictions and 46 state tax authorities, each with its own tax reporting requirements.
This would require out-of-state retailers to spend billions for an array of tasks, including handling claims by tax-exempt customers, fielding inquiries from tax authorities, and addressing the inevitable glitches.
Even the simple act of classifying an item can be problematic, with thousands of idiosyncratic distinctions and definitions through each state’s tax code. For example, in Wisconsin, the Wisconsin flag as well as the U.S. flag is not subject to tax. Other flags are taxable, unless they are bundled with flagpoles.
Moreover, since large retailers such as Amazon already collect taxes in every state, expansion of the tax collection mandate would affect only smaller businesses and individual sellers — those least able to afford the burden.
If states wish to impose costs on retailers within their borders, they should be able to do so. But retailers should not be subject to mandates from states with which they have no physical connection, and whose policymakers face no accountability for the costs they impose. Without such accountability, future sales-tax increases could come more easily, and the competitive pressures of neighboring states would be minimized.
The Supreme Court got it right 25 years ago. There is still no good reason to expand the reach of states tax collectors. While seeming to level the retail-tax playing field, it would instead create new burdens, while bulldozing fundamental principles of federalism. Instead, Congress should step forward to protect and codify the pro-federalism protections set out in Quill.
This piece originally appeared in The Washington Times
*To read this commentary on The Heritage Foundation website, click here.