After Quill the law has been in flux relative to how sales tax will be treated for online sellers. With the SC decision in South Dakota v. Wayfair pending, there is more uncertainty than ever.
New Zealand Adopts the Amazon Tax
Since the 1992 decision in Quill v. North Dakota, which limited sales tax to businesses with a physical presence in-state*the legal pendulum has been swinging the other way*and everyone is holding their breath for the expected decision in South Dakota v. Wayfair, currently pending before the Supreme Court*and expected to open the door for states to tax online sales. The New Zealand version of the *Amazon tax* will apply to small goods like books, shoes and novelties under $400. New Zealand already has a *Netflix* tax that applies for the purchase of offshore digital subscription assets.
The New Zealand tax is a Goods and Services Tax (*GST*). The tax is a 15% tax. If you are an overseas retailer with more than $60,000 of revenue and sell to New Zealand, you have to register with the New Zealand Government and begin adding GST tax when they put an item in their online shopping cart. New Zealand expects to haul in $53 million in 2019 with the tax.
Of course, for worldwide merchants who sell only a small amount of goods to New Zealand, one might query whether the expense and complexity of this extra reporting and setting up a sales tax payment process would make continuing to sell to New Zealand unprofitable*and deprive New Zealand residents of valuable goods and services.
The *Netflix* tax which applied to offshore retailers selling digital products in New Zealand has been in place since 2016. It was targeting Apple Music, Netflix, and other streaming or download-style revenue. To date, it has raised $162 million. This would suggest that it has not scared online subscription-based sellers from reaching out to New Zealand. But, these products, aside from advertising spend and overhead, are nearly pure profit on a per-transaction basis, whereas international shipping of goods has a much lower profit margin.
While the stated purpose of the New Zealand law is to be retailer friendly, even the playing field for local bookstores, local music shops, and local sellers of novelty goods* I question whether online *convenience* buyers are going to hunt down these physical products because they are a little cheaper at a local shop. I will have to check the research, but are online *convenience* buyers and in-store *retail* price-shoppers two separate buying audiences? In other words, is price or convenience the basis for shopping online?
Right now, state side, the Seattle City Council is going against Amazon and other big companies by proposing an *head tax* that would tax big businesses on their number of employees. With that proposal, Amazon halted plans to rent out a large office tower in the City. Amazon announced that it paid about $250 million in state and local taxes in Washington last year. Thus, big business is fighting a war on multiple fronts. States want to tax them for selling their goods across state lines, and also for localizing their operations, leaving businesses in an unstable legal environment not conducive to making sound long-term decisions.
How will South Dakota v. Wayfair pan out?
Congress has been slow to legislate a solution. Various bills have been proposed but haven*t been passed (Mobile Workforce, Business Activity Tax Simplification Act, Remote Transactions Parity Act*to name a few).
South Dakota v. Wayfair, targets a law requiring internet sellers to collect the state*s sales tax when they sell to South Dakota residents. The case touches on constitutional considerations under the *Commerce Clause.* Justices Kennedy and Thomas did not join in the original *Quill* decision, leaving the door wide open for change. Gorsuch previously wrote about the *Quill* case in a decision called DMA v. Brohl, 575 U.S. __ (2015). Gorsuch, along with a panel of 10th Circuit Appellate Judges reviewed a similar scenario. Direct Marketing Association (*DMA*) is a Colorado trade association for mail order catalogues and other direct response medium. They challenged a law that imposed reporting obligations on out-of-state retailers, regardless of whether they had a physical presence in Colorado. The 10th Circuit panel determined the case could not proceed in Federal Court because of the Tax Injunction Act and when the case was remanded they found that the reporting requirement didn*t violate the Dormant Commerce Clause because it did not unduly burden or restrain interstate commerce, even though it may have *inhibited* it to some degree by *shaming* out-of-state online merchants. Whether the Supreme Court is right or wrong, this is truly splitting hairs, and businesses require bright-line rules so that they can deploy capital with confidence.
Kennedy, who along with Thomas, had been a hold out in 1992 for Quill, specifically wrote about Quill's "tenuous nature", and the "serious, continuing injustice faced by Colorado and many other States" of being able to only collect sales taxes from brick-and-mortar stores, and offered "it is unwise to delay any longer a reconsideration of the Court's holding in Quill.* This was taken as a call to arms by the *Kill Quill* movement. Thomas also stated, "the relief sought by petitioner [Direct Marketing Association] would not 'enjoin, suspend or restrain the assessment, levy or collection' of Colorado's sales and use taxes." And this was the same opinion ultimately adopted by the 10th Circuit Court of Appeals.
Another interesting fact is that Gorsuch clerked for Justice Kennedy! So, no surprise that their views on the future of sales tax are on the same page.
Kennedy stated, *Because of Quill and Bellas Hess, States have been unable to collect many of the taxes due on these purchases. California, for example, has estimated that it is able to collect only about 4% of the use taxes due on sales from out-of-state vendors.* He went on to say, *these hardships,* have been amplified by the ubiquity of the Internet:
*The Internet has caused far-reaching systemic and structural changes in the economy, and, indeed, in many other societal dimensions. Although online businesses may not have a physical presence in some States, the Web has, in many ways, brought the average American closer to most major retailers. A connection to a shopper*s favorite store is a click away*
regardless of how close or far the nearest storefront. Today buyers have almost instant access to most retailers via cell phones, tablets, and laptops. As a result, a business may be present in a State in a meaningful way without that presence being physical in the traditional sense of the term.*
Kennedy could not be any clearer about his views on the outdated nature of the *physical presence* test and how he sees brick-and-mortar and online retail being in competition with one another, rather than two separate audiences*and he also assumes that the states lose out due to online retail, despite a paucity of actual empirical data to suggest that this is the case. So, while his analysis of the appropriateness of the current legal test to modern modes of commerce may ring true; nonetheless, the policy prescription he relies on is tenuous at best. Moreover, what is glossed over is the *transaction cost* or *externality* businesses face when confronted with the complexity of being subject to disparate tax regimes across-the-country and attempting to comply with an avalanche of non-uniform reporting/payment requirements from coast-to-coast. The cost and complexity of being accountable to 50 state sales tax reporting and payment regimes and creating real-time processing logistics to send payments to all of these various stakeholders would doubtlessly have just the kind of chilling effect on commerce that the Commerce Clause was intended to prevent.
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