U.S. Supreme Court ruling opens door for Arkansas, other states to tax e-commerce

State lawmakers and others working to overhaul the state’s cumbersome tax code applauded an almost-split decision issued Thursday (June 21) by the U.S. Supreme Court that could allow Arkansas and other states to collect sales taxes from online retailers.

By a thin margin of 5-4, the nine Supreme Court justices reversed an earlier and oft-cited high court decision that has been debated widely at Arkansas House and Senate committee hearings at the State Capitol as revenue-hungry state lawmakers look to the Internet as a source of perhaps millions of dollars in new taxes from online retailers near and far.

In today’s decision, the Supreme Court ruled for the state of South Dakota in the case South Dakota v. Wayfair Inc., upholding that state’s requirement that large-scale online sellers without a physical presence in the state collect and remit sales and use taxes. Justice Anthony Kennedy offered the majority opinion with Justices Ruth Bader Ginsburg, Samuel Alito, Clarence Thomas and Neil Gorsuch joining.

In his opinion, Kennedy wrote the so-called “nexus” or physical presence rule based on a 1992 U.S. Supreme Court decision, Quill Corp. v. North Dakota, was “unsound and incorrect.” That earlier ruling addressed the obligations of mail order businesses to collect sales tax on out-of-state sales and has since been extended to include online retailers.

“The physical present rule has long been criticized as giving out-of-state sellers an advantage,” Kennedy wrote.

“Each year, it becomes further removed from economic reality and results in significant revenue losses to the States. Those critiques underscore that the rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause,” Kennedy wrote of the court’s principle that address the validity of state taxes.

Justices Thomas and Gorsuch also wrote concurring opinions for the majority, but Chief Justice John Roberts wrote in his dissenting argument that he opposed discarding the physical-present rule because of the Internet’s  prevalence and power on the nation’s economy since the 1992 court decision.

“E-commerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical-present rule,” opined Roberts. “Any alteration of those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress.”

ARKANSAS REACTIONS
Arkansas has generally abided by federal legislation based on the 1992 decision where the default rule in most states without any online retailers must collect sales tax on Internet sales to customers in those states where they have a so-called “nexus, or a physical presence.”

According to various estimates, sales tax collections from out-of-state retailers would bring an influx of between $30 million to $100 million in new revenue to state budget coffers. In March 2017, Amazon announced that it would begin collecting sales taxes in Arkansas and other states that were considering legislation to require the online giant to do so.

Gov. Asa Hutchinson said he will work with state officials to determine what is right for Arkansas.

“The Supreme Court decision recognizes both the constitutional role of the states and the changing nature of the world economy. The decision is based upon fairness in the marketplace and is good news for the homegrown businesses in Arkansas that have to compete with the online businesses that operate globally and sell locally. I expect states to move quickly in light of the Court’s decision and I will be consulting with the Department of Finance and Administration and members of the General Assembly to determine what, if any, action needs to be taken in Arkansas.

At the end of the 2017 legislation, Senate Bill 140 was rejected on the Arkansas House floor by a vote of 43-50, with seven members not voting. In a fierce debate over that so-called “Amazon tax” bill, sponsored by former Sen. Jake Files of Fort Smith, supporters argued that Arkansas needs to join the growing list of states that will allow online retailers without a physical presence in the state to collect state and local sales taxes from online shoppers who frequent popular e-commerce sites such as Amazon.

At a meeting Thursday of the bicameral state Tax Reform and Relief Task Force at the State Capitol, the chairman of the House Revenue and Tax panel that rejected SB 140 four times before it was pushed out of committee said Arkansas lawmakers should wait to see what the federal government and other states will do before enacting new legislation.

“Right now, it is a little bit early because it has just been decided …, but I think most of my colleagues right now want to take a ‘wait-and-see’ approach to see what Congress will do because if each individual state does their own thing it would be almost like a streamline tax,” said Rep. Joe Jett, R-Success.

In the 2017 session, Jett’s committee was one of most influential legislative panels at the State Capitol and played a key role in the passage of Gov. Asa Hutchinson’s $50.5 million tax cut plan that reduced the tax rate for Arkansas’ lowest wage earners making below $21,000 a year. That legislation also created the tax reform task force, which consists of 16 legislators who have spent several months reviewing a myriad of proposals to modify and simplify the state’s tax code and make Arkansas tax laws more competitive before the 2019 session.

Following Thursday’s meeting where the tax reform panel heard testimony from the Department of Finance Administration’s (DFA) staff on lowering the state’s income tax bracket from 6.9% to 6%, news of the Supreme Court decision had others commenting on whether Arkansas lawmakers should move forward and enact legislation to collect and remit taxes on all Internet purchases in Arkansas.

STATE CHAMBER, LITTLE ROCK MAYOR CALL FOR ACTION
Little Rock Mayor Mark Stodola, who also serves as president of the National League of Cities, praised the Court’s decision.

“Online retailers should be required to follow the law and pay taxes just like our local small businesses,” he said. “Congress has failed to act for 26 years as the impact on cities, including Little Rock, has continued to skyrocket. I applaud the Court’s decision and Arkansas cities and towns will now look to our state government to take action so that we can collect the estimated millions of dollars that are not currently available to provide services, including those that allow for safe delivery of packages purchased online, for our citizens.”

State Chamber of Commerce President and CEO Randy Zook, following a break in the all-day tax reform committee meeting, told Talk Business & Politics he believes the U.S. Supreme Court decision offers a chance for Arkansas’ cities and counties to “stop the hemorrhaging” on current sales tax collections.

During the 2015 and 2017, Zook lobbied the Arkansas legislature to support legislation that would force DFA to collect unpaid and uncollected revenue from Internet sales to lessen the income tax burden on individual Arkansans earning between $20,000 and $75,000 annually, and to ensure that sales tax reforms, on items like groceries and overhead costs for manufacturers, remain in place.

At the federal level, the State Chamber has also asked Arkansas’ congressional delegation to back U.S. Rep. Steve Womack, R-Rogers, on his Marketplace Fairness Act, a bill that would empower states to collect sales taxes – currently owed, but widely unpaid – by residents who make purchases from out-of-state companies through online transactions.

According to DFA estimates, Womack’s bill would direct nearly $100 million in new and currently owed revenue to cities and counties, and $134 million to the state annually.

“All it does is enforce existing law. We all owe the tax, but we are all just a bunch of tax scofflaws …,” Zook said jokingly of the high court’s historic ruling.

Womack also applauded Thursday’s Supreme Court decision, calling it a win for “Main Street” businesses and state and local governments. Like Jett, the Arkansas lawmaker who now heads the influential U.S. House Budget Committee and was once the mayor of Rogers, also called on Congress to swiftly enact legislation similar to what South Dakota has enacted.

“For years, I have highlighted the inherent unfairness of the Quill standard and urged Congress to be proactive in finding a commonsense solution,” Womack said in a statement. “By overturning Quill’s outdated nexus requirement, the Supreme Court has done what Congress should have long ago – pave the way for Arkansas and 44 additional states to collect the taxes they are lawfully owed and level the playing field for our local businesses.”

Jeremy Horpedahl, assistant professor of economics at the University of Central Arkansas’ Center for Research, said the Wayfair decision has provided an important clarification for states on taxing remote sales.

“The exemption of remote sales from the sales tax base has always been a legal distinction, not one of good tax principles. Good tax policy is to treat all transactions equally, regardless of where the seller is physically located,” said Horpedahl. “Arkansas must now decide how to implement a law that will comply with Wayfair, and what to do with any new revenues.”