A court case that’s made its way before the U.S. Supreme Court this week could significantly affect sales tax collection by states — Indiana included — if the high court is willing to overturn a precedent set in 1992.
In the current case, South Dakota v. Wayfair, the Supreme Court is asked to determine whether a state can assess online retailers a sales tax when the retailer is not physically located in that state.
To allow such tax collection, the court would have to overturn its 1992 decision in Quill v. North Dakota, which requires a company to have a physical presence in a state before it can be taxed.
South Dakota argues the retail landscape of 2018 is a far cry from that of the Quill decision just 26 years ago. It argues states are losing out on billions of dollars in taxes rightfully owned by online, out-of-state businesses.
Indiana University law professor David Gamage said an overturn of Quill seems likely, and that would have a big impact on states’ revenues.
“An overturn of Quill would mean substantial revenue impacts for the state,” Gamage said. “Many large e-commerce vendors already collect sales tax in many states, but many aren’t. There is some disagreement about the revenue impact, but it would be large by any estimate.”
The U.S. Government Accountability Office estimated that state and local governments could have gained from about $8 billion to $13 billion in 2017 if states had the authority to require sales tax collection from all remote sellers.
Gamage, a tax scholar who spent two years working in the U.S. Department of the Treasury’s Office of Tax Policy, said some vendors have built their business models around not paying sales tax and relying on individuals to report their own use taxes.
“Certain e-commerce vendors have organized their affairs so as to effectively evade sales and use tax requirements,” Gamage said. “There is no doubt this is taking sales away from brick-and-mortar stores, at least to a significant degree.”
A leveling of the playing field is needed, according to Best Buy CEO Hubert Joly, who says tax loopholes offer online retailers an advantage other retail outfits can’t match.
“We have worked for years as part of a broad coalition of large and small retailers to close the loopholes that gives online-only retailers up to a 10 percent price advantage over retailers operating stores, by choosing not to collect sales tax,” Joly said in a statement sent to the Tribune-Star this week.
“This situation is a result of a Supreme Court decision made before online shopping even existed. As a result, we have a situation where the government is picking winners and losers and where states are prevented from collecting revenue that is owed to them,” Joly said.
Indiana State University economics professor Robert Guell said he can’t think of a just reason for the government to favor one retail form over another.
“Economists, generally, are not pleased when the government puts a thumb on the scale between one type of economic competitor and another,” Guell said.
It does not help the economy when “sales taxes are charged to one type of competitor and not the other,” Guell said. “There is no good justification for having an arbitrary rule like the physical presence rule.”
However, Guell added, it is true that out-of-state retailers don’t rely on resources – such as police and fire resources – in every locale they’d be taxed.
“That might be the only argument really on the other side,” Guell said.
Gamage said he expects a decision from the Supreme Court by June.
In Indiana, the General Assembly in 2017 passed a law that mandates sales tax be collected from retailers who sell $100,000 or more worth of product to Hoosiers per year or do 200 or more transactions with Indiana customers.
That law, however, is unenforceable while the 1992 decision in Quill v. North Dakota stands.
Reporter Alex Modesitt can be reached at 812-231-4232 or at firstname.lastname@example.org. Follow him on Twitter @TribStarAlex.