On Thursday, in a 5-4 decision, the Supreme Court handed down a major victory in South Dakota v. Wayfair, concluding that state and local governments can require remote retailers with no physical presence in the state to collect and remit sales taxes. After years of congressional inaction, the decision brings cities one significant step closer toward achieving Main Street fairness.
Every city leader should have questions about Wayfair‘s impact. These initial reactions and answers will help them catch up quick:
In deciding the case, Justice Kennedy wrote the majority opinions and was joined by four other justices: Ginsberg, Alito, Gorsuch (filed a concurring opinion) and Thomas (also filed a concurring opinion). Justice Roberts penned the dissenting opinion and was joined by three other justices: Breyer, Sotomayor and Kagan.
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The majority argued that the physical presence — established in National Bellas Hess v. Illinois (1967) and reaffirmed in Quill v. North Dakota (1992) — was both “unsound and incorrect.”
The majority focused on three lines of reasoning. First, Justice Kennedy wrote that — in today’s world of growing e-commerce — the test was an unnecessarily strict threshold for determining whether or not a state or local government can require sales tax collection from a retailer.
Second, while the test was meant to prevent discrimination between intrastate and interstate commerce, in reality it accomplished the exact opposite. He wrote that the test was “a judicially created tax shelter for businesses that limit their physical presence in a state but sell their goods and services to the state’s consumers.
And finally, the majority argued that the test was simply arbitrary.
Going forward, having a substantial economic presence in a state will likely be sufficient grounds for a state and local government to require a retailer to collect and remit sales taxes. This is a huge step forward in our nearly three-decades-long fight to close the online sales tax loophole.
Despite some reports, however, this is not about imposing new taxes — but rather about closing an unfair tax loophole that has cost state and local governments billions in lost revenue each year. In fact, the International Council of Shopping Centers and the National Conference of State Legislatures have estimated that the loophole cost state and local governments $26 billion in lost revenue in 2015.
That’s less money for teachers, public safety and the infrastructure that online retailers rely on to deliver their packages. This is also about making sure everyone plays by the same rules, and ensuring an equal playing field between small brick-and-mortar stores and online retailers.
Some states already have been working on laws similar to South Dakota’s, and more states will likely follow in the near future. Cities can work with their state municipal leagues and state legislatures to ensure that methods for the collection of local option sales taxes are included as these discussions move to statehouses.
Twenty-three states have already joined the Streamlined Sales and Use Tax Agreement (SSUTA), and we expect more to do so in light of today’s ruling. SSUTA offers a model for how states can simplify and centralize their collection methods.
It has been developed with nearly two decades of input from cities, counties, states and retailers, and it answers many of the questions around how taxes from online sales should be collected, including how local option rates are collected and remitted.
At this point, it’s too soon to say with certainty whether Congress will respond. If Congress does decide to act, NLC is ready to remind them that sensible legislation already exists. The Marketplace Fairness Act (MFA) in the Senate and the Remote Transactions Parity Act (RTPA) in the House both guide states into SSUTA and establish systems to collect destination-based sales taxes that are fair for everyone.
About the Authors: Irma Esparza Diggs is a senior executive and director of federal advocacy at the National League of Cities. Follow Irma on Twitter @iediggs.
Brian Egan is NLC’s Principal Associate for Finance, Administration and Intergovernmental Relations. Follow him on Twitter @BeegleME.