$350M At Stake For New Jersey In Landmark Supreme Court Case About Online Shopping

It’s only fitting that the U.S. Supreme Court will spend part of Tax Day hearing oral arguments in one of the most significant tax cases in years.

On Tuesday, the justices plan to take up South Dakota v. Wayfair, a case about sales taxes that could affect anybody who shops online and give a boost to brick-and-mortar stores across the country.

The case could also be a roughly $350 million windfall for Gov. Phil Murphy as he seeks new revenues to fund New Jersey’s pension system, repair NJ Transit, provide free community college tuition and increase state aid for schools, among other promises.

“This is the largest tax case of this millennium,” said Max Behlke, director of budget and tax policy at the National Conference of State Legislatures.

The high court will weigh whether to overturn two precedents dating back 50 years that prohibit states from requiring retailers to collect and remit sales tax if they don’t have an in-state physical presence.

When the Supreme Court last grappled with that question in Quill Corp. v. North Dakota, in 1992, the first secured Internet transaction was still two years away. Companies like eBay and Amazon didn’t exist, and the main beneficiaries of the rulings were mail-order catalog companies.

Times have changed, of course, and now online sales are growing at four times the rate of total retail sales. All told, consumers do about 10 percent of their shopping online, a share that’s only expected to swell in the future.

The current set-up means that if a New Jersey resident were to go online and purchase a $1,000 camera from a company based solely in New York, that company would not be required to collect New Jersey’s 6.625 percent sales tax, or $66.25, on the order. 

Technically, the buyer is still obligated to pay that money to New Jersey in the form of a use tax, but that rule is almost never followed in practice. The federal Government Accountability Office, or GAO, estimates that voluntary individual compliance nationwide is between 1 and 2 percent.

That puts brick-and-mortar retailers at a competitive disadvantage compared with online retailers, while states lose billions of dollars every year in uncollected sales and use taxes.

“When you see that in the last three to six months, the reports come out that Americans are saving less than ever and shopping more, you would think that would translate to correspondingly higher gross sales tax collections,” Behlke said. “But that isn’t the case. And primarily that is because of Internet sales.”

To South Dakota and dozens of other states with sales taxes, those facts are enough to overturn the Quill decision and give states more authority to collect tax on so-called remote sales. The GAO estimates that New Jersey alone stands to gain between $216 million and $351 million, while other estimates put the figure higher.

Potential hit for online retailers

But online retailers argue that a reversal of the Quill decision would saddle them with complex and costly collection obligations, raise the specter of intrusive audits from thousands of taxing jurisdictions and expose them to retroactive tax assessments.

Most of the top 20 online retailers in the U.S. already collect taxes in nearly all states, but smaller operations and sole proprietors would be harder hit. 

In addition, the Quill decision and another high court precedent were based on the U.S. Constitution’s so-called “dormant” Commerce Clause, a judge-created legal doctrine that says states cannot unduly burden interstate commerce without congressional approval. 

The same logic still applies, Wayfair and other companies have argued in the case.

Many states have already passed laws aimed at getting around the Quill decision to tax remote sales. According to USA Today, more than 20 states define a seller's physical presence as including any affiliated website, while 10 states require out-of-state sellers to notify buyers and inform states of unpaid sales taxes. 

New Jersey has a “click-through” nexus law under which remote sellers are considered to have an in-state presence if they receive sales referred by a New Jersey business, and Murphy announced his intention earlier this year to beef up reporting requirementsfor remote sellers.

The South Dakota law at the center of South Dakota v. Wayfair is more straightforward. It requires remote sellers to collect and remit sales tax if they have annual in-state sales exceeding $100,000 or complete 200 transactions.

Behlke predicts that if South Dakota wins, many other states will rush to enact similar laws.

But if it doesn't, he said, “then states might try other avenues to collect sales tax that might be burdensome on retailers and consumers.”

A decision is expected by the end of June.

Original Article