SCOTUS Should Balance Main Street and Online
For more than 50 years, the Supreme Court has prevented states from requiring out-of-state sellers to collect sales tax unless the seller has a physical presence, such as a local store or warehouse, in the state in which the sale occurs. Although the out-of-state sellers’ customers are supposed to remit tax on such sales, very few of them do so. As online retail sales continue to grow, states’ annual revenue loss has been estimated to be as much as $33.9 billion in 2018.
In 2016, the South Dakota legislature launched a challenge to the Supreme Court’s holdings by passing Senate Bill 106, which requires any large seller of tangible personal property that does not have a physical presence in the state to collect and remit sales tax. Wayfair and other online sellers challenged the law. On April 17, the Court will hear oral argument in South Dakota v. Wayfair.
The fundamental issue is the impact of state and local sales taxes on the competition between online sellers and traditional brick-and-mortar retailers. In order to uphold the South Dakota law, the Court must find that (1) the law does not discriminate against interstate commerce and (2) the law’s tax collection obligations do not impose undue burdens on interstate commerce.
South Dakota and many of its supporters argue that the physical-presence requirement sharply reduces state revenue collections, seriously harms competing brick-and-mortar businesses, and causes out-of-state sellers to take costly steps to avoid establishing a physical presence. The physical-presence requirement, they argue, effectively forces states to favor out-of-state sellers without a physical presence over local sellers.
Wayfair and its supporters argue that eliminating the physical-presence requirement would impose undue burdens on out-of-state sellers, especially small and mid-size companies. They emphasize the heavy costs businesses will incur trying to comply with as many as 16,000 inconsistent and changing state and local sales tax regimes across the country and the legal risks they could face when they make mistakes.
It may seem that the Supreme Court will be forced to simply pick a side in a tug of war between two parties. Luckily, there is an established legal framework that recognizes and protects the legitimate economic interests of both camps. In a 1970 case called Pike v. Bruce Church, Inc., the Court established a balancing test that weighs the burdens on interstate commerce against the benefits to the state from the regulation. In our view, applying Pike balancing is the right approach for the Court to take in reviewing tax collection obligations, which are ultimately a type of regulation. If the Court applies that balancing test in South Dakota v. Wayfair, two factors should make it easy to conclude that any burden placed on out-of-state sellers is minimal relative to South Dakota’s interest in collecting sales taxes.
First, the regulatory burden on out-of-state retailers of complying with South Dakota’s sales tax regime is negligible. South Dakota, along with 22 other states, is a full member of the Streamlined Sales and Use Tax Agreement (SSUTA), under which the member states’ sales taxes are standardized to minimize the administration and recordkeeping burden on sellers. The SSUTA provides for a centralized online registration system through which retailers can register and agree to collect and remit sales and use taxes for all taxable sales to customers in the member states. And importantly, the SSUTA also allows out-of-state retailers to use approved service providers – paid for by the state, not the retailers – to collect and remit taxes to the state. By standardizing and harmonizing many aspects of their sales taxes and by providing compliance software and other assistance, the states that have signed on to the SSTUA have reduced the cost to out-of-state sellers of complying with sales tax in other states almost to zero.
Second, the South Dakota law contains clear rules that protect small or infrequent out-of-state sellers. An out-of-state seller with no physical presence in South Dakota has no obligation to collect or remit taxes if it makes fewer than 200 sales of tangible personal property, with a total value of no more than $100,000, per year in the state.
As we explained in an amicus brief that we filed in this case, Pike balancing makes more sense than the rigid, obsolete, and inefficient physical-presence requirement. Under Pike balancing, states could require out-of-state sellers to collect and remit sales tax, but only if the states take steps (as South Dakota has done) to reduce the potential harms emphasized by Wayfair and its supporters. While balancing tests can sometimes be difficult to implement, Wayfair is an easy case to resolve. The South Dakota law should be upheld because it has been carefully structured to avoid placing undue burdens on interstate commerce.