Supreme Court Enters E-Commerce Tax Debate

Online retail is becoming big business. Last year, it accounted for 13% of total retail sales and contributed 49% of the industry’s growth. Despite massive growth and ubiquity, the collection of sales tax from online purchases is governed by a 25-year old Supreme Court decision. This has led to countless battles between states suffering from dwindling sales tax collection and the behemoth companies, like Amazon, that dominate e-commerce.

In Quill Corp. v. North Dakota, the Supreme Court established the rule for the collection of state sales tax for purchases from out-of-state retailers. In order for the consumer’s state to collect sales tax on the purchase, the retailer would need to have a physical presence in the consumer’s state. This holding has persevered since 1992 in the face of numerous legal challenges by states and the shortcomings of Congress to change it.

The growth in e-commerce has only functioned to accelerate the debate on the Quill decision. South Dakota passed a law requiring all online retailers to collect sales tax for purchases by South Dakota residents, regardless of whether the retailer had a physical presence in South Dakota. Wayfair, an online furniture retailer, is now embroiled in a legal battle with the state of South Dakota over this very law.

South Dakota Attorney General Marty Jackley explained to the Supreme Court last month the detrimental consequences to his state when the Quill holding governs: “First, our states are losing massive sales tax revenues that we need for education, health care, and infrastructure. Second, our small businesses on Main Street are being harmed because of the unlevel playing field created by Quill, where out-of-state remote sellers are given a price advantage.” Initial analysis reveals a divided Supreme Court on whether or not to reverse Quill and require all online retailers to collect sales tax throughout the United States.

In the interim, other states are using other ways to collect online sales tax. Massachusetts and Ohio deem the use of website “cookies,” small files saved to a consumer’s computer when a site is visited, as a physical presence.

Outside online retail, FinTech companies are also watching how the Supreme Court might word its ruling in the coming months. Over the past few years, states, borrowers, and the Consumer Financial Protection Bureau (CFPB) have attempted to argue that online installment loans originating with tribal lending entities (TLEs) actually occurred in the home of the borrower. This would have the effect of imposing state usury and licensing laws on sovereign tribal operations.

But attempting to equate an online furniture retailer with an economic arm of a sovereign tribal government ignores two important differences- tribal sovereignty and Supreme Court precedent regarding rate exporting in financial services.

Rate exporting permits a business to rely on the usury laws of its home jurisdiction when contracting with consumers across state lines. Rate exporting is common with credit cards, and led many credit card companies to relocate operations to South Dakota, a state with limited usury requirements. The Supreme Court determined in Smiley v. Citibank that the National Bank Act permitted banks to export rates without violating UDAP. In the CFPB’s case against the TLEs, the tribal lending code in question lacks strict usury controls. Similar to Citibank, the TLEs should be free to export rates to other jurisdictions free of UDAP challenges. Congress is the sole American authority related to Indian commerce via the U.S. Constitution; the CFPB cannot shift this authority to state regulators simply because the agency is expressly prohibited by Congress and Supreme Court precedent from bringing an action against the tribe.

Considerable Supreme Court precedent demands the preemption of state law regarding sovereign tribal activity. Dating back to the 1830s, the Supreme Court has consistently held that states lack jurisdiction over tribal affairs. More recently, America’s highest court has extended tribal sovereignty to commercial activities of economic subdivisions of the tribe for business dealings on and off reservations. Any changes to this doctrine must come directly and unequivocally from Congress. As the Supreme Court justices debate the future of online sales tax collection, FinTech will watch for potential fallout.