BLOOMINGTON, Ind. -- The U.S. Supreme Court is expected to issue a decision soon in South Dakota v. Wayfair Inc., potentially making it easier for states to collect taxes on online sales.
South Dakota is asking the court to reverse a 1992 decision that found the Constitution's commerce clause barred states from requiring retailers without a physical presence in the state to collect tax on sales to state residents.
John L. Mikesell, Chancellor's Professor Emeritus in the IU School of Public and Environmental Affairs, who has spent his career studying sales and property tax policy as well as administration and public budgeting systems, is available to comment. He calls South Dakota v. Wayfair "the most significant Supreme Court case in state and local government finance in the last quarter century."
Under the 1992 Quill Corp. v. North Dakota decision, he said, states have found it nearly impossible to collect sales taxes on online purchases from businesses that don't have a physical presence in the state. If South Dakota prevails in the current case, that would change.
"If South Dakota is successful," Mikesell said, "states may require vendors to collect the tax on the basis of economic -- not necessarily physical -- presence, and economic presence would be established by a significant volume of sales within the state. Some states already have laws that will take effect immediately on Supreme Court action, and others are likely to respond quickly."
If Wayfair wins, he said, states will continue attempting to get vendors to collect and pay sales taxes, which is far more efficient than tracking down individual purchasers.
"States may also hope that Congress will change the rules for requiring collection," he said, "but Congress has not acted in the years since Quill, and it is not clear that it would act quickly now."
It is estimated that getting remote vendors into the sales tax system would increase the tax base by about 5 to 7 percent, Mikesell said, somewhat reducing pressure on state finances. It would also eliminate remote vendors' competitive edge over local brick-and-mortar businesses.
"The retail sales tax yields around one-third of all state tax revenue nationally and around 49 percent of Indiana general fund revenue," he said. "The financial viability of the tax in the new online economy is a matter of great concern for state fiscal sustainability, and the Wayfair case puts the tax clearly on the line."
Mikesell can be reached at [email protected] or 812-855-1454.
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