Every year, around April 15th, I write a column about a tax matter that is important but under most reader’s radar. In the past year, I have written a lot about taxes, but this column revisits an issue discussed in my first column, published in August 2014. In that column, I responded to a nationally syndicated columnist who opined that states should not be allowed to collect sales tax on internet purchases because that would create a new tax. In my response I noted that on-line purchases which are not subject to sales tax are subject to use tax, which consumers, rather than retailers, pay. Since most people don’t voluntarily pay consumption taxes, the use tax is hard to enforce. Furthermore, by not collecting sales tax, on-line merchants can sell merchandise cheaper than bricks and mortar stores do. While Amazon and eBay currently collect sales tax on some of their sales, they did not do so when they were getting started. This advantage undoubtedly contributed to their success. Amazon clearly has disrupted retailing by developing an incredible logistics platform that benefits consumers in the long run. To a much lesser extent, smaller mom and pop on-line businesses have also disrupted the historical retail delivery system. These smaller businesses have complained that filing sales tax returns in every state in which a customer is located is an undue administrative burden. However, technology has advanced to the point where there are software solutions and clearing agencies which eliminate that burden at nominal cost. Clearly state and local governments have lost significant tax revenue from this retail evolution. The argument that expanding sales tax to on-line purchases creates a new tax is flawed. Such expansion merely changes an existing unenforceable tax collection mechanism to one that is enforceable. When Ronald Reagan was governor, about 40% of California’s revenue came from sales tax. Today, sales tax revenue accounts for only about 20% of California’s revenue. On-line sales and exemptions for products delivered electronically (such as iTunes songs or Kindle books) have contributed to the decline. This has caused California to significantly increase its dependency on high income taxes which are extremely volatile and drive business from the state. The current rules are based on a 1992 US Supreme Court decision, Quill Corp. v. North Dakota. Quill Corp. was a catalog retailer that sold office supplies to customers in North Dakota. The North Dakota Department of Revenue attempted to subject these sales to sales tax. Because Quill did not have any employees or facilities in North Dakota, the Supreme Court held that it was not liable for collecting sales tax on sales that were shipped from other states to customers residing in North Dakota. Justices Kennedy and Scalia were the swing votes in the decision. Their decision was based on the interstate commerce clause which precludes states from imposing duties that interfere with trade among the states. Conversely, imposing a use tax on the consumer is not a violation of the interstate commerce clause because it taxes consumption instead of commerce. North Dakota unsuccessfully argued that, because sales and use taxes are imposed at the same rate, the sales tax does not impose duties that restrict interstate commerce. It merely provided a mechanism for collecting use tax. Precluding the collection of sales tax prevented North Dakota from exercising its legal rights afforded under the due process clause to collect a consumption tax. Amazon and eBay relied on the Quill holding to justify not charging sales tax to customers located in states where they did not have a physical presence. In 2012, in response to significant pressure from state governments, both companies began charging sales tax to some customers in certain states, including California. Quill was not an online retailer. When the case was decided, the impact of catalog sales on bricks and mortar retailers and on state sales tax collections was minimal. However, many legal scholars have said that the disruption caused by on-line retailing warrants a second look at the Quill decision. In a 2015 decision, Justice Kennedy opined that the Quill decision was “tenuous” because of the impact of on-line retailers. He further indicated that the Supreme Court should re-examine its decision and place greater emphasis on the due process clause. Prior to joining the Supreme Court, Justice Gorsuch expressed a similar view in a lower court decision. Apparently, the swing votes supporting the Quill decision are no longer present. Responding to Justice Kennedy’s comments, in October 2017, the state of South Dakota filed a petition with the Supreme Court requesting that the Quill decision be overturned. The Court granted certiorari and will hear the case on April 17th. A decision is expected in June. The Supreme Court rarely hears cases involving tax law, but when they do, its decisions frequently have extensive repercussions on the tax landscape. We are likely to see another such change affecting internet sales. Jim de Bree is a retired CPA who resides in Valencia.