WASHINGTON -- The Supreme Court agreed Friday to reconsider one of the most contentious issues in the business world: whether online retailers must collect sales taxes.
By taking on a law passed by South Dakota's legislature for the express purpose of testing its legality, the court will return to an issue it addressed 25 and 50 years ago, before consumers did nearly 10% of their shopping on the internet.
The clear signal from the justices is that they may be ready to reverse themselves and demand that online retailers collect and remit sales taxes, even in states where they have no physical presence.
That would be a victory for states and traditional businesses, but a defeat for smaller online retailers who claim they cannot navigate dozens of state sales tax systems the way major players such as Amazon do.
“Retailers have supported this case since the beginning and believe it is the right case to correct the constitutional course set more than 50 years ago -- well before the advent of e-commerce -- that today gives online-only retailers an unfair commercial advantage at the expense of local retailers,” said Retail Litigation Center president Deborah White.
Even though 17 of the top 18 online retailers have begun collecting sales taxes, states project that they could lose $34 billion this year. The Government Accountability Office estimated in November that requiring "remote sellers" to collect sales taxes would produce a lesser amount of $8 billion to $13 billion.
"No one could have foreseen in 1992 the ways that internet retail would remake the American economy in 2017," South Dakota argued in court papers.
"This court must take account of how its own, outdated precedent has played a part in that development, pushing economic activity (and important entry-level jobs) from Main Street to distant tech companies, with a tangible effect on everyday American life."
States have enacted a variety of laws in hope of collecting more sales taxes, particularly when in-state businesses are used as conduits. The battles have led to lawsuits in Alabama, Colorado, Indiana, Massachusetts, South Carolina, Tennessee and Wyoming, among others.
The Supreme Court weighed in first in 1967, ruling that states cannot force "catalog" retailers to collect sales taxes in states where they are not physically present. Their most recent precedent from neighboring North Dakota was handed down in 1992 -- "before Amazon was even selling books out of Jeff Bezos’s garage," lawyers for South Dakota told the court.
Sen. Heidi Heitkamp, D-N.D., who brought that case to the high court when she was North Dakota's tax commissioner, called the decision to hear the new case "welcome news for the small businesses that create jobs and are the lifeblood of our communities."
But Sen. Jeanne Shaheen, D-N.H., who has fought legislation to require online sales taxes, said a reversal "would be especially damaging to New Hampshire, where our small businesses have no experience collecting sales taxes and should not be forced to become tax collectors for other states."
South Dakota's law places the burden of collecting and remitting sales taxes on companies that do at least $100,000 in sales or handle at least 200 transactions in the state. As one of seven states without an income tax, South Dakota is heavily dependent on its 4.5% sales tax.
State courts predictably struck down the law, citing the Supreme Court's precedent. Then, to help boost their chances, lawyers for the state helped to solicit 15 "friend of the court" briefs from retailers, states, economists and others even before the justices decided to hear the case.
The online retailers challenging the law -- Wayfair, Overstock and Newegg -- argued the issue should be left to Congress, which has tried for years to find a compromise. The Senate passed a measure in 2013 to let states collect sales taxes from online retailers if they had at least $1 million in annual sales there, but it died in the House.
"Sales tax collection has become more complex as the number of tax jurisdictions has more than doubled since 1992," they argued in court papers. "Moreover, the integration of tax collection software is extraordinarily expensive."
Steve DelBianco, president of NetChoice, an association of online businesses and consumers, said the justices "will learn how new state laws are imposing unreasonable tax burdens on out-of-state businesses."
Congress still has a role to play, said Matthew Shay, president of the National Retail Federation: “Even if the court rules in favor of a modern sales tax policy, legislation will still be needed to spell out how that would work.”
The issue of internet sales taxes has vexed lawmakers for nearly two decades. They are caught between serving Main Street "brick-and-mortar" businesses that pay taxes their online rivals often sidestep, and their political desire to avoid being seen as raising or creating new taxes.
Sales taxes are a crucial source of revenue in the 45 states that collect them. They are even more important in seven states that have no income tax, including Florida and Texas.