Retailers Call on Supreme Court to Close Legal Loophole Benefiting Online Retailers

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Retailers Call on Supreme Court to Close Legal Loophole Benefiting Online Retailers

U.S. Supreme Court weighs ecommerce and sales tax collection.
U.S. Supreme Court weighs ecommerce and sales tax collection.

WASHINGTON, D.C. — Industry groups are looking for a level playing field when it comes to e-commerce and taxes, and they are asking the U.S. Supreme Court to be the one to level it.

Oral arguments in South Dakota v. Wayfair began before the court on April 17. The case centers around a 2016 South Dakota law requires online merchants with more than $100,000 in sales to state residents or 200 transactions with state residents to collect sales tax, according to the National Retail Federation (NRF).

The law was struck down last year by South Dakota's highest court, which cited the U.S. Supreme Court's 1992 Quill Corp. v. North Dakota decision. In that case, the justices said online sellers can only be required to collect sales tax in states where they have a physical presence such as a store, office or warehouse, the association explained.

Part of their reasoning, according to NRF, was that there were more than 6,000 state and local sales tax jurisdictions across the country and that the regulations were too complex for a seller to know how much to collect unless they were doing business locally. 

NRF argued in a friend-of-the-court brief that technology has made the court's concern obsolete, citing a wide variety of software available to automatically collect the sales tax owed, much of its available free or at low cost.

As NRF pointed out, many online sellers today already collect sales tax from customers in multiple states, either voluntarily or because they have the physical presence that requires them to do so. However, other online sellers do not collect, and NRF said in a second brief filed with other retail groups last month that lack of uniform collection is "inflicting extreme harm and unfairness" on local retailers by "distorting the retail market in favor of absentee ecommerce." 

"This case is largely about whether collecting sales tax is an undue burden on interstate commerce," said NRF President and CEO Matthew Shay said. "That might have been the case in 1992 but technology has eliminated that concern just as it has transformed the retail business and so much of the rest of our world. Today, there's an app for that." 

According to Shay, NRF has been working with policymakers to fix the disparity for almost 20 years.

"We are very hopeful that the reason the justices have agreed to hear this case is that they want to update a ruling that has become antiquated in the light of developments over the past quarter-century. It's time for the Supreme Court to clear the way for modern sales tax policy that will finally put all channels of retail — from stores to online — on a level playing field where everyone competes under the same rules," he said.

"Online sellers who don't have to collect sales tax have held an unfair price advantage over local retailers for far too long," Shay added.

RILA Weighs In

In an op-ed piece in The Hill, Retail Industry Leaders Association (RILA) General Counsel and Retail Litigation Center (RLC) President Deborah White outlined why the case is important to retailers.

"At issue is whether all retailers should have to comply with the same basic tax collection rules that every brick-and-mortar store follows every day," White wrote.

"In 1967, when the court first considered this issue, consumers received paper catalogs in their mailboxes in front of their houses every day. Consumers flipped thru the catalogs and ordered products by hand-writing on paper forms and mailing the forms back with a paper check," she explained. "Over the past quarter century, network computing and e-commerce have dramatically changed the world in ways that were unforeseeable and unimaginable to the court a quarter century ago."

According to White, online retailers take advantage of legal loophole which creates an illusion of price advantage, undercuts local businesses and affects the local jobs and tax base. RILA members include more than 200 retailers, product manufacturers, and service suppliers, which together account for more than $1.5 trillion in annual sales.

"If the Supreme Court refuses to close its legal loophole, but instead allows online-only retailers to continue to use it to distort the marketplace, local businesses will continue to close their doors, and state and local elected officials will be faced with a choice between cuts to critical services or tax increases on everyone in order to subsidize out-of-state sellers," White wrote. "South Dakota vs. Wayfair gives the court an opportunity to restore fairness and free market competition. The time has come for the U.S. Supreme Court to do just that."