[UPDATE:Supreme Court seems to lean toward George Isaacson’s arguments against online sales tax]

LEWISTON — A local lawyer is scheduled to argue Tuesday before the U.S. Supreme Court one of the most significant state tax cases of the past quarter-century, according to state tax practitioners.

George Isaacson, a senior partner of Brann & Isaacson, represents three national internet companies that sell their products to customers worldwide, including in South Dakota.

That state’s legislature passed a law in 2016 requiring all businesses that annually sell to South Dakotans more than $100,000 in goods or services or make more than 200 transactions within the state to collect and remit sales taxes to South Dakota.

That requirement runs counter to existing practice and U.S. Supreme Court precedent that only requires businesses with a physical presence in a state — including stores, distribution centers, inventory, employees and agents — to collect and turn over sales tax to that state.

South Dakota sued three internet companies — Wayfair Inc., Overstock.com and Newegg — for failing to register for sales tax collection for products they sold online to residents in that state. Those three companies hired Isaacson’s local law firm to represent them in the lawsuit.

The South Dakota Supreme Court found in favor of the online retailers, ruling that the state law was unconstitutional. But the state has appealed that ruling to the U.S. Supreme Court.

Thus, Isaacson and law partners Martin Eisenstein and Matt Schaefer are in Washington, D.C., for oral arguments Tuesday before the nine justices. In January, the country’s top court had agreed to hear the case.

“What this case concerns is whether access to the internet will remain free and open for companies to reach a national market,” Isaacson said, “or whether it will be encumbered by 12,000 different state sales and use tax jurisdictions.”

If the companies Isaacson represents lose their case, many small businesses that rely on the internet to stay in business could go under, he said. The burden of determining the various requirements of thousands of tax jurisdictions and then collecting and remitting sales and use taxes — not only for states, but also for municipalities, counties and other jurisdictions that charge those taxes — would be so onerous that many of those businesses would be limited to selling their products locally or within the state or go out of business, he said.

“The burdens are substantial,” Isaacson said.

He noted that Supreme Court precedent is on his clients’ side.

The case rests on the Commerce Clause of the U.S. Constitution. In an effort to encourage free trade among the former colonies, the framers of the Constitution included the clause to prevent states in the early days of the republic from erecting trade barriers, including tariffs, duties and taxes, among themselves, explained Isaacson, who also teaches constitutional law at Bowdoin College.

This “common market” produced the “most vibrant economic engine in the history of mankind, the United States economy,” he said.

For decades, the standard for requiring companies to collect sales and use taxes for a state or locale has been to establish a physical presence in that state or locale. That could change if South Dakota were to prevail in this case.

“What the court, in previous cases, concluded is that a company that is located outside the state and only uses “the instrumentalities of interstate commerce,” such as telephone lines, or the U.S. mail to communicate with customers, and then similarly uses instrumentalities of commerce to deliver products, such as the U.S. Postal Service, UPS or FedEx, cannot be deputized to mandatory tax collection.”

In other words, the courts have ruled that companies can take orders and sell products to customers in a state and not be bound to the collection of taxes if that company isn’t physically located in that state in any way.

In 1992, the U.S. Supreme Court reaffirmed that standard in a North Dakota case where an Illinois company that engaged in remote selling to customers in North Dakota prevailed and was not obligated to collect that state’s sales tax, Isaacson said.

“The issue before the U.S. Supreme Court is whether to maintain the physical presence rule or eliminate it,” he said.

The court’s decision will have a “major impact on electronic commerce and catalog sales.”

Isaacson points out that the case has been followed closely by the electronic commerce industry, state government officials and consumers because the stakes are high.

“The case has garnered national attention,” he said.

Forty amicus (friend-of-the-court) briefs have been filed in the case, including the U.S. government, more than 20 members of Congress, numerous state and local government organizations, trade associations, companies, academics and professionals, he said.

Amazon now collects sales tax in all states, as do 19 of the top 20 internet sellers, including Walmart, Target, Costco and Macy’s, because they have stores, distribution centers or some other form of physical presence in the states. For that reason, sales tax is being collected on more than 80 percent of internet sales nationwide.

It is small- and medium-size sellers who will be most adversely affected if the existing standard is changed. That is why eBay and Etsy, which provide online marketplaces for small sellers, have filed amicus briefs in support of Isaacson’s clients.

“More than 10,000 small companies each year start doing business on the internet,” Isaacson said, “and we hope to maintain the ability of every imaginative entrepreneur to reach a national market unimpeded by the crazy quilt of varying state tax laws.”

This case marks Isaacson’s second time arguing a case before the nation’s highest court. Three years ago, he and his partner Schaefer argued a case before the U.S. Supreme Court on the issue of federal jurisdiction and won in a unanimous decision.

cwilliams@sunjournal.com

Lewiston lawyer George Isaacson is in Washington, D.C., to argue a case Tuesday in front of the U.S. Supreme Court. (Andree Kehn/Sun Journal)