Eric Sinclair's family-owned furniture business dates back five generations and 130 years. These days, he figures his three stores in eastern South Dakota operate at a 6.5% disadvantage to competitors who sell only online.
At least once a week, he says, a customer who's already been helped with product selection and room design in one of his Montgomery's showrooms brings up prices found on the Internet, where sellers often don't tack on state and city sales taxes.
"They want to know if we can beat the price," Sinclair says. "It really puts me on an unlevel playing field."
More than 1,100 miles away in Powder Springs, Ga., Laurie Wong balances the books at her 15-year-old non-profit thrift store and food pantry by selling more than 2,000 products on eBay. With relatively low sales and no physical presence in other states, she escapes their sales tax laws.
Sinclair and Wong are among millions of merchants and consumers nationwide who could be affected by the Supreme Court's decision in a case being argued Tuesday — one purposefully created by lawyers for South Dakota to upend two high court precedents dating back 50 years.
When those rulings exempted so-called remote retailers from having to pay sales taxes in other states, mail-order catalog companies were the main beneficiaries. Amazon.com had not yet begun selling books out of Jeff Bezos' garage.
But "times have changed," South Dakota notes in court papers. Today, online sales are growing at four times the rate of total retail sales, and state and local governments in 45 states are losing billions of dollars annually in taxes. (Alaska, Delaware, Montana, New Hampshire and Oregon do not have sales taxes.)
If the high court reverses itself and clears the way for most Internet sales taxes, online retailers could face some 10,000 tax jurisdictions with varying rates and rules.
“If the Supreme Court isn’t careful and just says, 'We were wrong before, we’re not really going to set limits or parameters,' you could see a lot of disruption," says Joseph Bishop-Henchman, executive vice president of the nonpartisan Tax Foundation. "States might wish to push the envelope as far as they can.”
That would be a setback for Reflections of Trinity, where $500,000 in annual sales pays for 600 boxes of groceries delivered weekly to those in need, among other acts of charity.
"We'd be tied up in so much paperwork," Wong says. "It would take significantly from our revenue base."
Court poised for reversal
The battle over online sales taxes represents another in a string of cases that forces the Supreme Court to balance the Constitution and its own precedents against advances in technology.
When the court ruled in 1967 and 1992 that Illinois and North Dakota could not squeeze sales taxes from sellers with no presence in those states, there wasn't nearly as much at stake. Now consumers do nearly 10% of their shopping online, a share that will grow exponentially in the future.
Congress protected those Internet sellers in 1998 legislation that has since been made permanent. Then in 2000, a national commission urged states to simplify their tax systems as a precursor to taxing remote sellers. Twenty-four states eventually did so, but the nation's largest states with 70% of the U.S. population did not.
Stymied by the Supreme Court rulings and the Internet Tax Freedom Act, states have done their best to collect taxes on residents' out-of-state purchases. That has created a patchwork of laws. More than 20 states define a seller's physical presence as including any affiliated website. Ten states require out-of-state sellers to notify buyers and inform states of the unpaid sales taxes.
Perhaps tipping its hand, the Supreme Court in 2015 unanimously upheld Colorado's law requiring those notices and reports. Justice Anthony Kennedy went further than Justice Clarence Thomas's majority opinion, citing "a startling revenue shortfall" in many states and "unfairness" to local retailers and customers who pay the sales taxes.
And when the case returned to the U.S. Court of Appeals for the 10th Circuit, Judge Neil Gorsuch — now a member of the Supreme Court — said the half-century-old precedent was likely to "wash away with the tides of time."
What already has washed away is the notion that all online retailers avoid sales taxes. Most of the top 20 sellers collect taxes in nearly all states, either because they have added local showrooms or warehouses, or because of state laws. The top 100 retail sellers remit about 90% of the taxes owed.
But many smaller online retailers are women, minorities, veterans and people with disabilities who have taken advantage of the protections granted by the Supreme Court and Congress over the years.
The typical retailer on eBay sells between $10,000 and $500,000 annually, with customers in more than 300 tax jurisdictions. Etsy's sellers are even smaller: Nearly eight in 10 are sole proprietors, nearly nine in 10 are women, and nearly all are based in homes. Average annual sales: $1,710.
Paying 'sidewalk rent'
Enter South Dakota, which passed a law in 2016 requiring most out-of-state retailers to pay the state's 4.5% sales tax and up to 2% more in cities even if they have no physical presence in the state. Those with fewer than 200 transactions or $100,000 in sales in the state are exempt.
The state promptly sued three companies — Wayfair, Overstock and Newegg — that didn't pay up. Two state courts predictably ruled in favor of the companies, citing Supreme Court precedents and prompting the state's high court appeal.
South Dakota's argument is that online sellers have a presence in the state — not physical, perhaps, but economic. As one of seven states without an income tax, it is heavily dependent on sales taxes.
"This court's outdated physical-presence rule now causes outsized harms to state treasuries and fundamental unfairness among retailers," the state argues in court papers.
South Dakota retailers go further, calling themselves the lifeblood of their communities. They note their contributions to the 4-H rodeo, Little League teams, volunteer fire departments and families in need.
"Brick-and-mortar retailers refer to it as sidewalk rent," their brief says. "Remote sellers do not experience this. They are truly remote in every sense of the word."
For jeweler David Kline, being at a tax disadvantage means losses he estimates at several thousand dollars a year. He bases that on the number of customers who enter his Yankton, S.D., store seeking to repair jewelry bought online.
The Trump administration takes South Dakota's side, arguing that the high court should declare the state law constitutional because of flaws in its 1992 ruling. Only mail-order retailers should remain exempt, the government says.
Snickers and Twix
That's not how online retailers fighting the state see things. They say state and local sales taxes are too numerous and complex for grandmothers selling knit hats on Etsy.
Court papers filed by eBay and retailers who use the service cite several examples: Minnesota taxes blankets, but not baby receiving blankets. Texas taxes deodorant, but not antiperspirant. Illinois taxes Snickers bars as candy but Twix bars as food.
"Taxes are a burden," a bipartisan group of senators and House members notes. "Tax compliance can be an even greater burden."
Opponents also worry that if the court sides with South Dakota, other states would tax online retailers and set lower sales thresholds or none at all. Sixteen states have tax or reporting laws with thresholds as low as $10,000, according to the National Auctioneers Association, which calls the South Dakota law "an existential threat."
Former Republican congressman Chris Cox of California, who co-authored the 1998 federal law, says even South Dakota's law would apply to an out-of-state garage band with 200 downloads in the state.
Another threat that would loom over a ruling in favor of South Dakota: audits. The American Academy of Attorney-Certified Public Accountants says online retailers would become liable "for every mistake and missing piece of documentation." It says South Dakota already collects more than $10 million annually from auditing remote sellers.
"These costs are going to be fatal in many cases," says Andrew Pincus, an appellate lawyer representing eBay. A Supreme Court decision that does away with the physical presence requirement for sales taxes, he says, "will dramatically change the world."
At her Georgia non-profit, Wong hopes that's an exaggeration. In fact, she wants to contribute her fair share of state and local sales taxes.
“But they need to be fair," she says, "and look at the burden that they’re putting on small business.”
