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U.S. Supreme Court Rules That Local Governments May Collect Sales Tax From Internet Retailers

By Barry Skidelsky, Esq.*

On June 20, 2018, the U.S. Supreme Court released an opinion of wide ranging importance not only to those who make retail sales over the Internet, but also to state and local governments who wish to impose related sales taxes. The opinion in South Dakota v. Wayfair is available at https://www.supremecourt.gov/opinions/17pdf/17-494_j4el.pdf.

This case overruled a well-known 1992 U.S. Supreme Court decision (Quill v. North Dakota, 504 U.S. 298), which had held that the Constitution's Commerce Clause bars any state from collecting sales taxes from retailers who lack a brick-and-mortar presence in that state. In Wayfair, the court held that "the physical presence rule of Quill is unsound and incorrect."

Writing for the majority, Justice Kennedy explained that when Quill was decided "the court could not have envisioned a world in which the world's largest retailer would be a remote seller." Think Amazon, and consider that less than 2% of Americans had internet access in 1992, as compared to about 89% today. Further, U.S. mail order sales in 1992 totaled approximately $180 billion, while e-commerce retail sales alone last year reached an estimated $453.5 billion.

Kennedy also said the rule in Quill had created an unfair system favoring online retailers, in effect serving as a judicially created tax shelter for sellers that decide to limit their physical presence -- which also caused local governments to lose up to a total of $33 billion a year in sales tax revenue. At issue in the Wayfair case was the constitutionality of a South Dakota law that requires out-of-state retailers to pay sales taxes, provided they make at least 200 sales or at least $100,000 in sales in that state.

A dissenting opinion in Wayfair written by Justice Roberts opposes discarding the physical presence rule, because the internet economy has grown up in reliance on it. Any change to rules with the potential to disrupt such a critical segment of the economy should be left to Congress, he said. Collecting taxes on all e-commerce sales "will likely prove baffling for many retailers."

Currently, more than 10,000 state and local jurisdictions collect sales taxes, each with differing rules and rates. "This is neither the first, nor the second, but the third time this court has been asked whether a state may obligate sellers with no physical presence within its borders to collect tax on sales to residents," Roberts wrote. "Whatever salience the adage 'third time's a charm' has in daily life, it is a poor guide to Supreme Court decision-making."

This decision should be of immediate concern to anyone (not just major players like Amazon) who makes or who contemplates making retail sales online or via mobile devices -- taking into account not only location of the seller, but also location of the seller's buyers, customers, fans or audience. The Wayfair decision is part of a broader and emerging trend to increasingly transpose a variety of laws and regulations from the analog or real world into today's digital ecosystem, affecting the sale of entertainment, arts, and sports related merchandise - and much more.

*Barry Skidelsky is Chair of the NYS Bar Association's Entertainment Arts and Sports Law (EASL) section, former Chair of its TV and Radio Committee, and former Chair of the NY chapter of the Federal Communications Bar Association (whose members' practices in part involve work before the FCC in Washington DC). He also successfully served as an in-house General Counsel and Corporate Secretary for inter alia a publicly traded digital media company and a venture capital backed internet service provider, as well as a bankruptcy trustee (following nomination by a large financial institution he had consulted), and as a business broker. Barry provides diverse legal and consulting services to lawyers, other individuals, companies and local governments, offering particular value to those directly or indirectly involved with entertainment, media, technology and telecommunications. Contact Barry at bskidelsky@mindspring.com or 212-832-4800.

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This page contains a single entry from the blog posted on June 22, 2018 2:12 PM.

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