SCOTUS rules on internet sales tax case
In a long-awaited ruling with plenty of implications for Colorado, the U.S. Supreme Court has issued a landmark decision regarding states’ abilities to collect internet sales tax. The 5-4 decision reverses the court’s prior ruling and opens the door for collection from internet retailers even when they aren’t located—or don’t have “nexus”—in the state levying the tax.
The ruling in South Dakota v. Wayfair overturns the prior legal precedent set in 1992 in Quill Corp. v. North Dakota, which allowed internet and other remote retailers to avoid collecting sales tax and offer seemingly lower prices than their in-state counterparts. Seemingly, because as Associate Justice Anthony Kennedy astutely noted in his majority opinion, “(the prior standard) puts both local businesses and many interstate businesses with physical presence at a competitive disadvantage relative to remote sellers. Remote sellers can avoid the regulatory burdens of tax collection and can offer de facto lower prices caused by the widespread failure of consumers to pay the tax on their own.” What Kennedy was alluding to is the reality that while lower prices seem like a win for consumers, we often don’t realize that the requirement to pay the tax is not absolved, but merely shifted to us in the form of use tax.
Indeed, as the online economy grew throughout the 1990s, states and local businesses began to brainstorm ways to capture some of the revenue that was lost as a result of the tax loophole. In fact, Colorado created one current model for internet sales tax regulation when it enacted a requirement for online retailers that aren’t collecting and remitting tax to the state to notify both the consumer and the Department of Revenue of the sales tax owed by the consumer. This law was also litigated and, after the Colorado Supreme Court upheld the law, in 2016 the Supreme Court ultimately opted not to hear the case.
The implications of the new Supreme Court ruling are still being analyzed, but Colorado could benefit immensely from the changes. A 2017 report from the United States Government Accountability Office estimated that Colorado could see an increase in state and local government revenue of between $168 to $262 million from the expanded tax collection on remote sales.
However, there is no guarantee that Colorado can capture this new revenue without other reforms. Beyond our typical TABOR considerations resulting from increased revenue, the Court alluded to concerns about smaller internet retailers navigating the complicated sales tax requirements resulting from multiple taxing districts within some states.
While the revenue implications in Colorado remain unclear, we are encouraged by the Court’s recognition of the modernization of our economy and the impact it has on state and local governments’ bottom line. We love the quote from Justice Kennedy addressing this in relation to Wayfair, the respondent in the case and an online-only home furnishing retailer:
“In essence, (Wayfair) ask[s] this Court to retain a rule that allows their customers to escape payment of sales taxes—taxes that are essential to create and secure the active market they supply with goods and services. An example may suffice. Wayfair offers to sell a vast selection of furnishings. Its advertising seeks to create an image of beautiful, peaceful homes, but it also says that ‘[o]ne of the best things about buying through Wayfair is that we do not have to charge sales tax.’ What Wayfair ignores in its subtle offer to assist in tax evasion is that creating a dream home assumes solvent state and local governments. State taxes fund the police and fire departments that protect the homes containing their customers’ furniture and ensure goods are safely delivered; maintain the public roads and municipal services that allow communication with and access to customers; support the sound local banking institutions to support credit transactions [and] courts to ensure collection of the purchase price and help create the climate of consumer confidence’ that facilitates sales.”
In other words, Kennedy notes that the sales taxes that online retailers seek to avoid, actually fund the public investments that allow consumers to enjoy, and continue to purchase, online goods. We couldn’t agree more. That is why we are heartened by the Court’s decision and look forward to the policy discussions it drives both nationally and in Colorado.
CFI will continue to research the issue and resulting implications and provide updates on our blog.
