South Dakota officials, seeking a path for states to collect billions of dollars each year in sales taxes from internet retailers, will ask the state’s highest court Tuesday for a speedy defeat in pursuit of their true goal: an appeal to the U.S. Supreme Court.
South Dakota is the furthest along of several states attempting to overturn a 25-year-old U.S. Supreme Court decision that bans states from forcing retailers to collect taxes if the businesses lack a physical presence in their borders. The outcome has the potential to reshape the booming online commerce sector.
Here’s a look at the case:
WHAT’S GOING ON HERE?
The U.S. Supreme Court in 1992 ruled that retailers must have a physical presence in a state before officials can make them collect sales tax. States have since pushed Congress to address the issue without success, and one estimate put the loss to states — 45 have a sales tax — at roughly $26 billion in 2015. South Dakota estimates it loses about $50 million annually to e-commerce.
Online shoppers always have owed taxes on their purchases, but the rule has been widely ignored. Meanwhile, many e-commerce companies have relied on the 1992 ruling to avoid collecting taxes, while some companies such as Amazon have decided to collect state sales taxes.
WHY SOUTH DAKOTA?
South Dakota is attempting to have the U.S. high court ruling reversed. The state filed a lawsuit against several remote retailers in 2016 based on a law passed that year that requires out-of-state sellers who exceed revenue or transaction thresholds to comply with state sales tax laws. A state judge sided with the defendants in March.
In its brief to the South Dakota Supreme Court, the state acknowledges the “unusual” law is contrary to the 1992 decision and asks for a swift loss so the case can be appealed to the U.S. Supreme Court. The defendants’ brief calls it an “awkward, unprecedented, and unfair manipulation of the court system.”
Max Behlke, director of budget and tax policy at the National Conference of State Legislatures, said other states including Alabama, Indiana, Maine and Wyoming have similar laws.
“The fact that it is one decision away from … petitioning to the United States Supreme Court is by far further along than any other state,” he said. “The state tax world’s eyes have all been on South Dakota.”
The state says in its brief that the U.S. Supreme Court would only be able to decide the case by June 2018 if the state high court rules by about this time. It takes four U.S. Supreme Court justices to vote to hear a case, or grant certiorari.
If the Supreme Court overturns the 1992 decision, state tax collectors would be able to reach across their borders to impose sales tax obligations on businesses who sell to residents in their states, said Steve DelBianco, executive director of NetChoice, an e-commerce trade group.
DelBianco said that smaller retailers would be burdened the most if the decision is overturned. He said states are employing a strategy of “harassing” the retail community with a patchwork of laws and regulations including South Dakota’s “full-frontal challenge” to the high court decision.
“These multiple challenges to interstate commerce were designed to create so much chaos for the business community that it would beg Congress for relief,” he said.
Republican state Sen. Deb Peters, who sponsored the South Dakota law, said she grew tired of waiting for Congress to act. She said accounting technology has changed at “warp speed,” allowing businesses to collect taxes in jurisdictions nationwide as people’s purchasing habits have shifted.
“If the economy is changing, the way we do business is changing and the way people are purchasing items changes, our tax laws have to follow the world, or we’re going to be left in the dust,” said Peters, who is the new president of the National Conference of State Legislatures.