An 'Internet Sales Tax?' N.H. Businesses Brace for SCOTUS Case

Apr 16, 2018

Lorcan LaFleur, CFO for Nemo Equipment, in the company's headquarters in Dover, NH.
Credit Todd Bookman/NHPR

The United States Supreme Court will hear arguments Tuesday in a case with huge potential impact on New Hampshire businesses, as well as anyone who shops online.

The case essentially pits the 45 states that impose a sales tax against the handful that don’t, including the Granite State.

The case, South Dakota v. Wayfair, centers on how sales taxes are collected when a business in one state sells a product to a customer in another state.

Let’s use a Dover, N.H., company named Nemo Equipment as an example. Nemo makes high-end camping gear, including tents.

“This would be a two-person tent that we have here,” says Lorcan LaFleur, Nemo’s Chief Financial Officer, as he shows off their best selling product. “This is used for various backpacking adventures.”

Since I live in New Hampshire, if I go to Nemo’s website and buy this tent, I don’t have to pay sales tax because New Hampshire doesn’t have one.

But if I lived in, say, South Dakota, a state with a sales tax, and I ordered this tent online from Nemo, would I pay South Dakota’s sales tax?

“Currently, you would not be charged sales tax because we are a New Hampshire-based business,” says LaFleur.

Because Nemo Equipment doesn’t have any offices, warehouses, or retail outlets in South Dakota, Nemo doesn’t have to collect a sales tax on behalf of South Dakota. (Nemo does collect a sales tax from customers in California, however, because it uses a warehouse in that state.)

It’s been this way since 1967, when the Supreme Court ruled in a case involving mail order catalog companies, National Bellas Hess v. Illinois Department of Revenue, that as long as the business doesn’t have a “physical presence” in the state, it doesn’t have to collect sales tax there.

The economy has certainly changed since the Johnson Administration, and even since 1992, when the Supreme Court reaffirmed the physical presence rule in Quill Corp v. North Dakota. Mail order has been largely replaced by e-commerce. Today, South Dakota isn’t just losing out on a few catalog transactions--it’s losing out on sales tax receipts on a huge number of online transactions.

“This is really billions of dollars of revenue that is not changing hands,” explains Ian Samuel, a Harvard Law School lecturer who is following this case.

A recent GAO report found that states with sales tax were missing out on an estimated $8-13 billion in lost revenue, which impacts everything from school funding to infrastructure projects.

South Dakota is of the opinion the physical presence rule was wrong in 1967, and wrong today.

“What South Dakota is saying in this case is that it has become a really big deal, and so it no longer is possible to tolerate this mistake if the court does think it is a mistake,” says Samuel.

Forty-one states along with the Trump Administration have filed legal briefs in support of South Dakota, arguing there is simply too much lost tax revenue to let this stand.

On the other side of this case are online retailers, including Wayfair, eBay and Etsy, and states with no sales tax such as New Hampshire and Montana.

They contend it would be a massive burden to force businesses to calculate and remit the thousands of different state, county and local sales taxes that exist nationwide. Further, they argue that it would force small businesses to buy software and hire extra bookkeepers just to try to comply.

With the backing of Governor Chris Sununu, the New Hampshire Attorney General filed a brief in this case. Assistant Attorney General Anthony Galdieri says if the rules changed, companies in New Hampshire would find the tax reporting requirements overwhelming.

“And the last thing we need is for our small businesses to say the risk and uncertainty of doing business over the internet is just too high, I can’t afford to do it,” says Galdieri. “And they may very well go out of business if they can’t do it.”

They argue this issue should be settled not by the courts, but by Congress, which has debated this topic in recent years. Senator Jeanne Shaheen says one sticking point has always been how to treat states like hers that don’t have any tax revenue on the line.

“For us in New Hampshire, we would get no benefit from this, so what we’ve argued is that we should be exempt,” says Shaheen.

With no legislative fix in sight, for now, all eyes are on the Supreme Court. Ian Samuel with Harvard Law says the stakes in this case are sizable.

“It may not rise to the level of Bush v. Gore, but it is a biggie, for sure, and I think people are going to be paying very close attention to it,” he says.