The president’s recent attention to the tactics used by major online retailers comes as no surprise to those who understand the advantage that an antiquated legal loophole gives online-only sellers over their Main Street competitors.
{mosads}This is a legal loophole that the U.S. Supreme Court adopted for mail-order catalogs long before the birth of e-commerce and that online-only retailers have distorted in the decades since. At issue is whether all retailers should have to comply with the same basic tax collection rules that every brick-and-mortar store follows every day. The Supreme Court will consider this question today, Tuesday, April 17, when it hears oral argument in South Dakota v. Wayfair and, in so doing, revisits its 1992 Quill v. North Dakota and 1967 Bellas Hess v. Illinois cases that are the source of the problem.
In 1967, when the Court first considered this issue, consumers received paper catalogs in their mailboxes in front of their houses every day. Consumers flipped thru the catalogs and ordered products by hand-writing on paper forms and mailing the forms back with a paper check. In that era, the Court (perhaps not unreasonably) decided that requiring catalog companies to compute and assess the sales tax that each consumer owed was too difficult. In 1992, after the court’s legal doctrines had shifted and mail order had continued to grow, the court revisited the issue, but narrowly decided that the burden might still be too great and so left the old rule in place, while observing that Congress could always fix future problems.
Over the past quarter century, network computing and e-commerce have dramatically changed the world in ways that were unforeseeable and unimaginable to the court a quarter century ago. Calculating sales tax today is no more difficult than any other minor task. But the continued existence of the court’s rule from decades past allows large, sophisticated online companies to shirk the tax collection responsibility that local stores face every day. As a result, out-of-state competitors gain perceived price advantage over local law-abiding businesses and the taxes that consumers indisputably (but often unknowingly) owe go uncollected, which in turn, reduces funding for state services like education and police.
Retailers have long-supported a federal legislative solution to this problem, but Congress has not been able to get the job done. The Marketplace Fairness Act, which would have overridden the Supreme Court’s old rule and authorized state governments to collect sales taxes from online-only retailers, passed the U.S. Senate in 2013 with broad bipartisan support, but then stalled in the House of Representatives. The bill was re-introduced in the years that followed, but Congress failed to enact legislation despite support from across the political spectrum.
Congress’s inability to correct the problem caused by the court has had a critical impact on states like South Dakota and nine others where the citizens have opted to fund their governments through sales tax rather than personal income tax. Online-only retailers continue to methodically order their businesses to take advantage of the legal loophole in a way that shortchanges citizens by failing to collect the taxes that are owed and then trading off the illusory price advantage in a manner that undercuts local businesses — forcing many to the brink of extinction — thereby further eroding the local jobs and tax base.
Faced with Congress’s inability to act, South Dakota and other states wishing to enforce their tax codes have heeded the words of Associate Justice Kennedy and taken the issue back to the highest court in the land. In 2015, Justice Kennedy observed that, as a result of the court’s old rules:
“States have been unable to collect many of the taxes due on these purchases … The result has been a startling revenue shortfall in many States, with concomitant unfairness to local retailers and their customers who do pay taxes at the register.”
My organization, The Retail Industry Leaders Association, and the Retail Litigation Center, supports South Dakota’s argument in this case, and led the retail industry’s petitions to the Supreme Court during both the petition stage and merits stage of this case.
If the Supreme Court refuses to close its legal loophole, but instead allows online-only retailers to continue to use it to distort the marketplace, local businesses will continue to close their doors, and state and local elected officials will be faced with a choice between cuts to critical services or tax increases on everyone in order to subsidize out-of-state sellers. South Dakota vs. Wayfair gives the Court an opportunity to restore fairness and free market competition. The time has come for the U.S. Supreme Court to do just that.
Deborah White is general counsel at The Retail Industry Leaders Association (RILA) and president of the Retail Litigation Center.