US Supreme Court will reconsider whether internet sales should be taxed

The Supreme Court announced Friday, Jan. 12, that justices will hear arguments in a South Dakota case that aims to reverse a 1992 case, Quill Corp. vs. North Dakota, that critics argue places Main Street merchants at a significant competitive disadvantage compared to internet vendors.

As a result of the Quill case, online merchants only have to charge sales taxes when they have a physical presence—a store, warehouse or office—in the state where the customer resides. That gives internet vendors a distinct price advantage, critics complain, and deprives state and local governments of revenues needed to sustain services.

Pinch & Pour, 210 Broadway N., sells fine oils, balsamics and artisanal cheeses, and Fowlers is a men's and women's clothing and accessories shop.

Both specialty shops have fashionable storefronts and displays. Pinch & Pour also has an online store, which the Robbins saw as a competitive necessity in an age when more and more sales are moving to the internet.

"I think we had to because that's where a lot of people are going now is online," Julie Robbins said. "It's easy."

Matter of money

Online shopping, which continues to grow at a rapid clip, is grabbing an increasing share of sales. Some traditional retail stores are struggling, with store closings becoming commonplace.

The 25-year-old Quill decision—made in the mail-order catalog era, before the consumer internet existed—stems from South Dakota's challenge of the "physical presence" requirement. In deciding Quill, the justices signaled their decision would hold "at least for now," seeming to anticipate a changing retail landscape.

"We're banking on the Supreme Court making the right decision" if the justices agree to hear the case, said Mike Rud, president of the North Dakota Retail Association, which supports South Dakota's position in the case.

"It's just a tremendous issue for us in terms of having a level playing field," Rud said. "It gives them (out-of-state online vendors) a huge advantage from a tax standpoint. We are not afraid of competition by any means, but it's got to be fair competition."

A study by the National Conference of State Legislatures estimated the state of North Dakota lost $31.2 million and Minnesota lost $455.2 million in 2012 to untaxed online sales.

Ryan Rauschenberger, North Dakota's state tax commissioner, believes the loss now is closer to $50 million a year, but said that is "an estimate of an estimate," and said there is no way to come up with a definite figure.

"You don't really know what you're missing," Rauschenberger said. Whatever the figure is, the missed sales to out-of-state vendors, and the lost sales tax revenue, continues to grow rapidly, he said.

"We're seeing online go up 10 to 15 percent per year, nationally," he said. One recent national study estimated that more than 40 percent of the growth in retail sales in 2016 came from online sales, which could reach 12 percent of retail sales by 2020.

The fact that many out-of-state online vendors don't collect sales taxes means the revenue base for state and local services erodes, a problem that is expected to become worse over time, Rud said.

That affects everything, he said, from law enforcement to roads and other infrastructure projects, such as the metro area's $2.2 billion flood protection project, the local share of which is paid by county and city sales taxes. Local merchants, he added, also create jobs and contribute to their communities.

"Sooner or later it's going to come back and haunt us all," Rud said. "All that money adds up."

North Dakota and Minnesota are among 36 states that have signed on in support of South Dakota vs. Wayfair, Inc.

Earlier this year, the North Dakota Legislature passed a law that would enable the state to require out-of-state vendors to collect sales taxes—if allowed by a U.S. Supreme Court decision or congressional action.

The intent of the law, Rauschenberger said, was to eliminate the disadvantage facing North Dakota merchants, not to boost state revenues. Legislators could lower the tax rate in order to make the law "revenue neutral," he said.

Quill, based in Illinois, sells office equipment and supplies. In the early 1990s, the company sold almost $1 million in merchandise to 3,000 North Dakota customers. Now Quill sells online—one of a multitude of firms.

In the meantime, Julie and Gregg Robbins are thinking about launching an online store for Fowlers Heritage Co. But they're so busy that they haven't the time to do so. "But we know that's an area we need to do to be in the game. It takes time, it takes money, it takes somebody to help with your website."

A couple of blocks down Broadway at the Red Silo, a home decor and design store, Manager Todd Cody doesn't view untaxed online competition as a major threat for a specialty shop like his—but he does understand the concerns.

"Personally, I'm OK with it," he said. "It's been that way for so long, that's the way it operates." Red Silo does sell some items on a website for handcrafted goods and antiques. "I guess I see it as a consumer and a retailer, two different perspectives."

As a consumer, he likes being able to save by avoiding sales tax on larger purchases—but as a merchant, he understands the downside to brick-and-mortar retailers.

"It's definitely quite a conundrum," Cody said.

It's a conundrum the justices appear eager to tackle. Two justices on today's court were on the court that issued the Quill decision—and both have said they would like to revisit the case. Justice Anthony Kennedy has written that the court should find the appropriate case to reexamine Quill, an invitation South Dakota accepted. Justice Clarence Thomas has said the legal underpinning for the Quill case is "unworkable."

Meanwhile, the newest member of the court, Justice Neil Gorsuch, has written that the Quill decision gave itself an "expiration date." The Supreme Court is expected to hear arguments in April.

If the Quill decision is overturned, it would mean North Dakota was a quarter century ahead of the times.