It is doubtful anyone could have foreseen the growth in e-commerce that has occurred since 1992 when access to the Internet was still pretty limited. Certainly not the Supreme Court Justices who ruled that year on a case, Quill Corporation vs. North Dakota, that is currently having a major impact on the auto care industry and, in fact, all of e-commerce in the U.S.
Quill Corporation vs. North Dakota, involved the purchases by individuals of licensed software directly from a catalog offered by Quill Corporation in which the company claimed they did not need to collect sales tax since they had no physical presence in North Dakota. The Supreme Court ruled in favor of Quill based on the Commerce Clause which gives the federal government the power to regulate interstate commerce and prohibits state action that might interfere with trade between states. The Supreme Court ruled at the time that a company must have a physical presence in order to collect tax on the sale of a product into that state.
Fast forward to the 21st Century and sales over the Internet now stand at a whopping $400 billion, representing nearly 30 percent of all retail sales. Yet, the Quill vs. North Dakota case is still the law of the land. This puts brick and mortar retailers at a competitive disadvantage to online-only companies that are free from charging sales tax as long as they are headquartered outside the state where the sale occurs. This is one reason President Trump has targeted Amazon's tax dollars in recent days.
In order to bring fairness to the system and bring tax law into the 21st Century, a large group of trade associations, including the Auto Care Association have pushed Congress to enact what is termed, the Marketplace Fairness Act. This legislation would permit states to collect sales tax on Internet sales even if the online retailer has no physical presence in the state. Joining the trade groups in support of this legislation are the states themselves who are seeing an enormous source of revenue, about $23 billion every year, escape their grasp due to the Quill Supreme Court decision.
You might expect Internet-only retailers to oppose Marketplace Fairness legislation, but you might be surprised to learn that the legislation is also strongly opposed by many legislators who claim the requirement to collect tax on Internet sales would amount to a new tax, thus violating their pledge to never support a new or increased tax. Unfortunately, these “do-not-tax” legislators and Internet companies have managed to keep the legislative fix to Quill bottled up in Congress for several years.
Frustrated and with little near-term hope that the legislation could be advanced, many state legislatures have taken matters into their own hands, passing legislation that requires the collection of sales tax on Internet sales. The aim of these bills is clearly to trigger a review of the Quill decision by the Supreme Court.
The first state to move through the pipeline is South Dakota, which enacted the digital sales tax statute that would require sales tax collection for remote retailers with annual in-state sales exceeding $100,000 or 200 separate in-state transactions. Prior to the law coming into force on May 1, 2017, the state sent out notices of pending lawsuits to four of the largest out-of-state vendors that they believed would exceed the sales threshold and were not already collecting sales taxes. Three of the four companies refused to comply and they were sued in court. Of course, the court rejected the suits based on the Quill ruling, setting the stage for the hope by states that the Supreme Court would take on the case.
Auto Care along with other organizations filed an amicus brief, asking for the high court to review South Dakota vs Wayfair, Inc., Overstock.com, Inc., and Newegg, Inc. case based on the unfair advantage gained by remote sellers that do not need to collect sales tax. Thankfully, earlier this year, the Supreme Court agreed to hear the South Dakota case, scheduling oral arguments for April 17. A decision is expected in June.
There is no doubt that this is an importance case for both States and brick and mortar retailers. These groups believe this is not about increasing taxes, but with fairness. Brick and mortar retailers also have a major presence on the web, competing head to head with Internet-only companies which now have a built-in advantage. These companies believe they should not be penalized for also having a physical presence. What might have made sense in the '90s does not necessarily make sense now considering the impact of technology on current day retailing. Now, we can only hope the Supreme Court agrees!
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