South Dakota won’t be able to earn revenue from an internet sales tax passed in 2016 after a state court issued an order last week prohibiting the state from mandating that out-of-state sellers collect it.
The court decision could have ramifications for Mississippi’s attempt to force out-of-state online retailers to collect the state’s 7 percent use tax through a proposed administrative rule by the Mississippi Department of Revenue.
The 1992 U.S. Supreme Court decision Quill vs. North Dakota requires a company to have a physical presence (known as a nexus) such as a warehouse or office in a state before it can be compelled to collect sales tax. Since the three defendants in the South Dakota case — Wayfair Inc., Overstock.com and Newegg Inc. — lack physical presences in that state, they no longer have to pay the state’s internet sales tax.
Russ Latino, an attorney and the state director for the pro-economic liberty group Americans for Prosperity, says putting the Mississippi Department of Revenue’s proposed rule into action would only invite a legal challenge. He says that a concurrence by Justice Anthony Kennedy in the 2015 decision Direct Marketing Association vs. Brohl has opened the door for possible challenges to the Quill decision.
“All three states — South Dakota, Alabama and Mississippi — are trying to get around the physical standard in Quill,” Latino told Mississippi Watchdog. “Absent that case being overturned, these laws are invalid. I think the hope is that you create a situation or a test that allows you to revisit [the Quill decision].
“It doesn’t make any sense for us to pass a law that results in a bunch of litigation when what we’re trying to do has already been done by two other states.”
Dealing with a legal challenge to a long-standing U.S. Supreme Court precedent handed down in Quill and other earlier cases isn’t a barrier for the DOR.
DOR commissioner Herb Frierson told the AP earlier this year that that the whole purpose of the proposed rule was to get the U.S. Supreme Court to take another look at the Quill decision. Frierson also made a key admission.
“What we’re doing is probably unconstitutional, but we’ve got to do it to get another hearing,” Frierson told the AP.
Mississippi is already collecting revenue from Amazon, which signed a voluntary agreement in January to collect use tax for the state. The DOR has refused to release details of the agreement and any communications it had with the company.
One part of the proposed DOR rule that concerns many critics is the carrot-and-stick approach. The DOR says in the rule that a company that doesn’t come to a voluntary agreement with the state will be assessed retroactively, and “no statute of limitations will be used in determining the total tax liability for such taxpayers.” The implication is that those who register voluntarily with the state won’t face a retroactive assessment.
Taxpayers are supposed to pay a 7 percent “consumer use tax” individually on all purchases from out-of-state firms, which also is the same rate as the state’s sales tax. The key difference between the use tax and the sales tax is that municipalities and counties receive a chunk of the revenue from the sales tax, while all of the proceeds from the use tax go to the state’s general fund.
The Mississippi House’s attempt to pass an internet sales tax, House Bill 480, died in the Senate Finance Committee.