Regulation

Can South Dakota Move The Needle On A Federal Online Sales Tax?

The vagaries of international trade have become a favorite talking point on the political circuit, but there are arguably more important things going on within the U.S. proper to occupy much of the conversation. This is proving particularly true for more and more cash-strapped states that have spent years staring at soaring traffic for online retailers but little — if any — increases in the taxes reaped from this digital, transcontinental economy.

And South Dakota, for one, has had enough.

The Mount Rushmore State planted its flag on the states' rights side of the battle over the continued legality of a decades-old statute establishing the power of the federal government to bar individual states from collecting taxes on online retailers that have little to no physical presence within their borders. Internet Retailer reported that the circuit court filing names Overstock, Wayfair, Newegg and Systemax as retailers that have failed to register their intent to comply with a May 1 deadline set by a law passed back in March imbuing the state legislature with the right to require online merchants selling to South Dakotan shoppers to collect sales tax.

While the state did send notices to a combined 206 retailers that could potentially fall under the law's criteria — at least $100,000 in sales or 200 processed transactions with South Dakotans — only 40 ultimately registered ahead of the deadline. However, the state chose to name just four retailers — and not, for example, Amazon — in its legal challenge.

"Legal challenge" might actually be the best-phrased stone South Dakota has thrown at the beehive of transnational eCommerce. The state's filing makes direct mention of the irreconcilable contradictions it poses with the prevailing legal precedent, a 1992 U.S. Supreme Court decision in Quill Corp. v. North Dakota. In an age when physical, local commerce was still the default state of retail, the "Quill doctrine" restricted state governments from imposing taxable restrictions on out-of-state companies that have no "substantial nexus" within their jurisdictions and thereby, potentially, protecting the growth of nascent online merchants from protectionist trade policies.

Now, however, it's not just South Dakota that's allied in the fight to take down Quill.

If anything, South Dakota is late to the regulatory party. Alabama has been enforcing online sales tax since the start of 2016, and both Louisiana and Colorado are embroiled in their own battles to extend their taxable reach to a realm of commerce with a scope unimaginable back in 1992. To date, though, it's been slow going for the states pushing back against the tidal wave of eCommerce revenues that keep leaving them dry. Some companies, like Amazon, for instance, have already begun to voluntarily collect sales taxes in select states instead of draining resources into protracted legal fights across the country.

But what makes South Dakota's challenge to the Quill doctrine so interesting is how it seems to be formulated to elicit a final legal decision from the highest court in the land on the unresolved issue of online sales tax. Even the filing's opponents, such as NetChoice Executive Director Steve DelBianco, admitted that legislators intend not for the filing to stand as law in perpetuity but rather to draw the eyes of the highest courts that will look its way.

“The law was designed to fast-track to the state Supreme Court and on to the U.S. Supreme Court this challenge to the Quill doctrine," DelBianco said.

So, could South Dakota be the straw that broke online retail's back, holding up its special interstate tax status? The absence left by the late Antonin Scalia has some legal experts wondering if the time isn't right for revisions to, or a replacement of, the 23-year-old Quill doctrine.

“It is noteworthy that both of the justices who joined Scalia's opinion [concurring in Quill], Justice Kennedy and Justice Thomas, are still on the court, and Justice Kennedy, last year, stated in his concurring opinion in Direct Marketing Association that it is time to reconsider the court’s holding in Quill,” Craig B. Fields, chair of Morrison & Foerster LLP's state and local tax group, told Bloomberg BNA.

For now, though, federal law is on online retailers' side.

But, unlike in years past, "for now" is looking more and more like an operative phrase.

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