By putting an end to the bright line rule allowing the collection of sales tax only from companies with a physical presence in a state, the United States Supreme Court decision in South Dakota v. Wayfair, et al. created a new task for states: setting a threshold that online retailers must meet before a sales tax can be imposed. In Indiana, that task is already complete thanks to a 2017 law intentionally passed to spur SCOTUS action.
Under House Enrolled Act 1129 of 2017, Indiana can impose its 7 percent sales tax on any retailer that earns more than $100,000 in revenue or makes more than 200 separate transactions for tangible personal property, electronic products or services delivered in the Hoosier state. That threshold is identical to what the justices upheld in South Dakota, a result former state Sen. Luke Kenley said was orchestrated.
Saying online sales tax collection is an issue of fairness, Kenley said lawmakers in Indiana and South Dakota chose to pass nearly identical bills that went against standing precedent in the hopes the Supreme Court would reverse that precedent. Though Indiana’s law stayed implementation of the new threshold until it received federal approval, the June 21 ruling means that now, HEA 1129 can likely take full effect.
The justices’ 5-4 ruling in South Dakota overturns precedent dating back to 1967, when National Bellas Hess, Inc. v. Department of Revenue of Illinois held that a mail order reseller was not required to collect state sales tax unless it had a physical presence in the state. Though part of that ruling was overturned in 1992 by Quill Corp. v. North Dakota, the physical presence requirement was upheld.
But both of those rulings were made before the internet boom, so they did not account for the eventual growth of e-commerce, said Ice Miller LLP partner Mark Richards. Thus, as electronic competition has increased, brick and mortar businesses have been at a disadvantage because they were forced to collect sales taxes while their online counterparts were not, he said.
Sales tax issues have been further complicated by the fact that thousands of local tax jurisdictions exist across the United States, making it difficult for national companies to juggle their various sales tax requirements, said Nathan Hagerman, a tax attorney at Taft Stettinius & Hollister LLP. In response to that confusion, a coalition of nearly half of all states, including Indiana, formed The Streamlined Sales Tax Governing Board, an organization launched in 2000 to allow remote sellers to remit sales taxes without complications, Kenley said.
Plan in place
Through his work with Streamlined — where he represented Indiana from 2000 until his retirement from the Legislature in 2017 — Kenley was part of a group that testified before Congress in favor of allowing states to collect sales tax on e-commerce. The effort was based on the ruling in Quill, which held that Congress had the authority to provide clarity on the remote sales tax debate.
Kenley — who was once a small business owner — and other states’ advocates were able to get a bill through the U.S. Senate, but faced steadfast opposition in the House. Their legislative defeat is what spurred HEA 1129 and the South Dakota law at issue in the SCOTUS ruling.
“We thought, ‘Let’s pass a law that allows the states to assert the right to collect sales tax, and let’s … set it up for there to be a challenge and get it back to the Supreme Court,’” Kenley said.
Though the $100,000 or 200 transactions threshold was struck down by South Dakota state courts as a violation of the longstanding precedent, Justice Anthony Kennedy rejected the Quill holding as “unsound and incorrect” in the June 21 majority decision. Though the dissent believed that Congress should act to change sales tax laws, Kennedy wrote that, “It is currently the Court, and not Congress, that is limiting the lawful prerogatives of the States.”
Though the South Dakota decision clears the way for HEA 1129 to take effect, Richards noted there is another lawsuit pending against the law in the Marion Superior Court. However, American Catalog Mailers Association and NetChoice v. Adam Krupp, et al., 49D01-1706-PL-025964, was stayed on May 23 pending the SCOTUS decision. A status conference has been scheduled in that case for July 17.
Outside of Indiana, the ruling also creates questions about whether there are any parameters states must consider when imposing sales taxes on online retailers. Hagerman, for example, noted the justices did not say 200 transactions was the lowest bar a state could set. That means, in theory, states could set their sales tax standard at only 150 transactions, making it easier to impose a tax.
As those questions crop up, Hagerman said he expects more litigation to ensue as states and retailers grapple with the significant change in the e-commerce landscape.•