Mass. online sales tax strategy eyed as SCOTUS hears case
A dispute over whether states should be able to require online retailers to collect and remit state sales taxes is headed to the U.S. Supreme Court, but Massachusetts' approach to the issue is being eyed as a new strategy in the event the court rules against the states.
The U.S. Supreme Court on Friday agreed to hear South Dakota vs. Wayfair, a petition of South Dakota seeking to have the high court throw out its 1992 Quill vs. North Dakota ruling that states may not collect sales tax from remote retailers unless those retailers have a physical presence within their state.
Under current federal law, online retailers do not have to collect and remit sales taxes from customers to states where the company does not have a physical presence. Traditional brick and mortar retailers have long pushed for Congress to change the law, arguing the loophole gives online retailers an unfair competitive advantage.
"For years we've been arguing for a level playing field to correct the disparity that's existed," William Rennie, vice president of the Retailers Association of Massachusetts, said Tuesday. "We've got brick and mortar retailers here who have to collect the 6.25 percent sales tax on say, a book or a television, and online sellers selling the exact same product, maybe from a website based in California, are enjoying a 6.25 percent price advantage because they've been allowed to avoid the collection of the tax."
Rennie said online sales tax collection has been "the number one concern and number one issue" for many retailers "for decades."
"We're pleased that the court has agreed to take up this case. It's been 25 years since they last looked at this and times have changed," he said. "The internet has certainly taken over a significant portion of all of our lives and the sales are not insignificant."
Had state and local governments been able to require sales tax collection from all remote sellers in 2017, total government revenue collections would have been between $8 billion and $13 billion greater, according to a report issued late last year by the United States Government Accountability Office.
For Massachusetts, the ability to require sales tax collection from all online sellers last year would have meant between $169 million and $279 million, the GAO report found.
In his budget proposal put forward a year ago, Gov. Charlie Baker laid out a plan to begin by July 1, 2017 to collect sales taxes from online retailers who do not have a physical presence in Massachusetts but do more than $500,000 in sales in the Bay State annually.
Amazon, the largest internet retailer in America, began collecting sales taxes from its Massachusetts customers in 2013 after reaching an agreement with former Gov. Deval Patrick's administration.
When they rolled out the budget last year, Baker administration officials said they had the legal authority to effectuate the change without legislation and that it did not require a change in federal law.
But before the change could take effect, two online retailers brought a legal challenge against the state Department of Revenue's new policy and the administration rescinded the directive just days before the state was to begin collecting taxes from online sellers.
Instead, the DOR sought to make the change through the regulatory process, a more time consuming and public exercise that prevented the state from immediately accessing a revenue stream that Baker and legislators expected to generate $30 million for the fiscal 2018 budget.
DOR filed its regulation and held a public hearing on it in August, putting it in place with an October 1 effective date. That regulation has already been challenged -- a suit against DOR filed by electronics retailer Crutchfield Corporation is pending in the Virginia court system.
Since the regulation took effect, more than 250 businesses have registered with DOR to collect and remit the sales tax, the agency said. DOR did not make Revenue Commissioner Christopher Harding or any other official available to the News Service on Tuesday to discuss the state's approach to collecting the sales tax from online retailers.
Massachusetts' approach, though, has attracted attention around the country because it seeks the same end as the South Dakota case -- a state being authorized to require online retailers to collect sales tax -- but goes about it in a way that does not require a change in federal law.
"The Department of Revenue takes the position that most remote internet vendors already have sufficient contacts with Massachusetts to satisfy the physical presence requirement under Quill, and are obligated to collect Massachusetts sales tax regardless of whether Quill is overturned," lawyers from the global firm Reed Smith wrote in a September alert to clients.
Because the effectiveness of the Massachusetts regulation is not contingent upon the Supreme Court throwing out the Quill decision, the Massachusetts approach "potentially represents an even greater threat to remote sellers than the 'Kill Quill'" efforts, Reed Smith said.
"If South Dakota's litigation directly challenging Quill fails, the 'Massachusetts approach' could be the next method states latch onto in their unsuccessful (thus far) decades-long quest to remove the 'physical presence' requirement for sales tax collection," the firm wrote.
As they pursue more widespread collection of sales taxes, Massachusetts retailers are simultaneously advancing a ballot question that would lower the sales tax here from 6.25 percent to 5 percent and require the sales tax to be suspended for one weekend per year.
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