Whose Tax Is This?

Posted in: Tax and Economics

The US Supreme Court (SCOTUS) recently agreed to hear the case South Dakota v. Wayfair Inc, in which it will decide whether out-of-state retailers with no physical presence in the state are required to collect and remit sales tax on sales made to South Dakota purchasers. To answer this question, the Court must decide whether to abrogate its holding in Quill Corp. v. North Dakota, that a corporation without a physical presence within a state cannot be subject to that state’s sales and use taxes. SCOTUS has been reluctant to revisit the merits of the issue since Quill was decided in 1992.

Last year, a Government Accountability Office report estimated that state and local governments could collect from $8 billion to $13 billion in 2017 if states were given authority to require sales tax collection from all remote sellers.

Quill has been roundly criticized by Justices Kennedy, Thomas, and Gorsuch, and a significant number of specialists believe Quill should be overruled after 25 years of technological and economic progress. South Dakota attorneys affirm thatQuill in fact functions as a kind of subsidy for out-of-state internet retailers, who benefit from the very high rates at which consumers divert their purchases online to avoid taxes. They also argue that Quill unjustifiably harms main-street businesses and brick-and-mortar retail institutions.”

By contrast, respondents Wayfair, Inc., Overstock.com, Inc., and Newegg, Inc. argue inter alia that (i) Congress is the proper institution to address the issue; (ii) principles of stare decisis weigh against revising Quill; (iii) retailers rely on Quill and accordingly run their businesses; multistate sales tax collection are already burdensome; (iv) and remote sellers have always operated at a substantial cost disadvantage to local businesses, because remote sellers must charge (or absorb) shipping and handling fees.

Although there are many differences between the American and Brazilian taxation systems, the issue raised in the Wayfair case has already been considered in Brazil. Indeed, Brazil underwent similar discussions regarding its main state sales tax (ICMS: tax on the circulation of goods and transportation and communication services) on interstate sales to out-of-state non-taxable customers. Before 2015, remote sellers were required to pay ICMS for interstate sales of non-supply items only to the originating state of the goods.

Eighteen (out of 27, including Federal District) States of destination of non-supply goods managed to approve a resolution (ICMS Protocol n. 21/2011), under a board integrated by State and Federal Secretaries of the Treasury (National Council of Tax Policy – CONFAZ), assuring them an ICMS share.

However, soon after the Brazilian Supreme Court (STF) held Protocol 21/2011 unconstitutional in In re National Confederation of Trade, In re National Confederation of Industry and State of Sergipe v. B2W – Global Retail Company, heard simultaneously. STF acknowledged the need of a more isonomic sharing of ICMS among states, but addressed that new splitting rules required intervention of the Brazilian Congress and that’s how it was done.

In 2015, the Congress approved the 87th Constitutional Amendment (EC 87/2015), inaugurating new rules for ICMS sharing:


BEFORE EC 87/2015 AFTER EC 87/2015
One single ICMS rate: state of origin rate at 17% – 20% of interstate operations Two simultaneous ICMS rates: state of destination rate at 17%–20%, and the interstate rate at 7%–12% of interstate operations
State of origin rate due only to state of origin Interstate rate due only to state of origin
Difference between interstate rate (7% – 12%) and state of destination rate (17% – 20%) shared among states until 2019
Difference between interstate rate (7% – 12%) and state of destination rate (17% – 20%) due only to state of destination of non-supply goods after 2019


In order to avoid major impacts over states revenues, EC 87 provided a transitional rule, regulating the difference of interstate rate and state of destination rate sharing percentages until 2019:

  • 2015: 20% due to state of destination and 80% due to state of origin;
  • 2016: 40% due to state of destination and 60% due to state of origin;
  • 2017: 60% due to state of destination and 40% due to state of origin;
  • 2018: 80% due to state of destination and 20% due to state of origin;
  • 2019: 100% due to state of destination.

The Brazilian legislative option may not be the best solution, but it has virtually eliminated state disputes over taxes levied on out-of-state retailers. The lesson the United States should learn from Brazil’s experience is that a legislative solution might work better to resolve this issue, and is likely to cause less financial disruption to the states than an abrupt rule change. The Court is expected to decide the Wayfair case in its 2018 term, so Congress better act quickly.

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