The United States Supreme Court has declined to hear a case regarding internet sales tax (Direct Marketing Association (DMA) v. Brohl) that could have potentially set a new precedent for how sales taxes are collected from online purchases.
DMA v. Brohl challenged a Colorado law that requires out-of-state retailers to help facilitate tax collection by providing information on purchases made by Colorado residents. DMA alleged that the law violated the Commerce Clause of U.S. Constitution by discriminating against interstate commerce. DMA v. Brohl was seen as a way for the court to revisit the 1992 case Quill Corp v. North Dakota, which found that a state can only collect sales tax from a business if it has a physical location in the state. With the internet still in its infancy 25 years ago, the Supreme Court could not have foreseen the extent of the impact the ruling would have on the way we shop today. When shopping online, a customer often owes sales tax on purchases made within their state, and they may owe a use tax on those purchases made outside of their state. Some retailers will mislead customers by claiming customers can avoid sales tax by purchasing from them. While, in practice, this may be true, the customer is still legally obligated to pay the use tax as part of their annual state tax returns.
Several groups supporting the states’ ability to collect sales taxes on remote transactions were concerned that DMA v. Brohl was not the best case to attempt to overturn the precedent created by Quill, as it could be seen more of a privacy issue than a state’s rights issue. Advocates did not want to waste an opportunity for the highest court in the land to finally decide the hot issue. But all is not lost, a South Dakota law currently making its way through the legal system may be a more appropriate case with which to revisit the Quill decision. The South Dakota law requires remote sellers who either earn over $100,000 from South Dakota residents or make 200 or more sales to South Dakotans, to collect and remit sales tax to the state.
South Dakota is intent on getting this issue all the way up to the Supreme Court. But South Dakota is not the only state trying to have the Court hear such a case. According to the National Conference of State Legislatures (NCSL), in 2016, dozens of state legislatures introduced bills that would allow the respective states to collect sales tax from online retailers. Needless to say, the time is ripe for this issue to be addressed. Throughout the years, states have lost billions of dollars in tax revenue that has not been collected from online retailers. Research done by the University of Tennessee and NCSL found that in 2012, tax revenue losses by all states equaled about $11 billion for that year alone. In Illinois, where IREM is headquartered, the state lost more than $500 million dollars. We would have to imagine this number has grown as more people than ever are taking advantage of online shopping.
IREM supports the enforcement of the collection of online sales tax as it would level the playing field for our members who manage shopping centers and malls. Unfortunately, many consumers use these storefronts as a showroom where they can try on apparel, feel the upholstery of furniture, and browse various models of anything they can imagine. When they find what they want to purchase, often buyers will go online to search the internet for a good deal – an online retailer who doesn’t automatically collect sales tax. The consumer is convinced they are getting a great deal by avoiding paying the tax on the item, despite the requirement (which they ignore) to file these taxes later.
Read IREM’s Policy Position regarding internet sales tax.
About the Authors
Beth Wanless is the Senior Manager of Government Affairs at IREM and is responsible for all things public policy. She monitors legislation at the federal, state, and local level and creates advocacy strategies to enact or fight certain policy propositions. Andrew Lomo is the Government Affairs Liaison for IREM headquarters, working on industry legislative issues at the national, state, and local levels and assisting IREM Chapters in their public policy needs.