Your online shopping experience may get more expensive. The Supreme Court ruled today that states can compel online retailers to collect an Internet sales taxes even if they don’t have a physical presence in the state. The decision was narrowly made, 5-4, and it overturns the 1992 precedent that barred states from requiring businesses to collect sales taxes unless they had a substantial connection to the state. For the states, this ruling is a potential goldmine. According to the U.S. Department of Commerce, e-commerce sales in the first quarter of 2018 accounted for $123.7 billion. For consumers, it could mean paying more on their online purchases as costs are passed down.
What are the implications here? In overturning Quill Corporation v. North Dakota, the 1992 precedent was essentially deemed outdated.
“The Internet’s prevalence and power have changed the dynamics of the national economy,” Justice Anthony Kennedy wrote in the majority opinion. “The expansion of e-commerce has also increased the revenue shortfall faced by States seeking to collect their sales and use taxes.”
In other words, online sales are on the up and states are losing out on good money. It’s true that Quill basically incentivized retailers to avoid setting up a physical presence within the state to take advantage of what amounted to a judicially created “tax shelter.” Justice Kennedy went on to justify the ruling by stating that the states are losing out on annual tax revenues of $8 billion to $33 billion. Now, that tax shelter is gone.
What’s going to happen?
Inevitably, states will enact laws requiring online merchants to fork over sales taxes on transactions conducted within the state. Online transactions that were once sales tax-free will now include a sales tax. In some instances, this ruling technically doesn’t really change things from a consumer standpoint; consumers that order tax-free items online, but who live in states that charge a sales tax, are required to report the purchase to the state tax agency and pay the sales tax. This is called a “use tax,” though few people pay it.
What does this mean for online retailers?
In his dissent, Chief Justice John Roberts stated that small businesses will face challenges in complying with the new tax laws. Sorting through the convoluted regulations could be burdensome to small online retailers who might not have the resources to keep up with behemoths like Amazon.
He wrote: “Texas taxes sales of plain deodorant at 6.25 percent but imposes no tax on deodorant with antiperspirant. Illinois categorizes Twix and Snickers bars — chocolate-and-caramel confections usually displayed side-by-side in the candy aisle — as food and candy, respectively (Twix have flour; Snickers don’t), and taxes them differently.”
“One vitalizing effect of the internet has been connecting small, even ‘micro’ businesses to potential buyers across the nation,” he wrote. “People starting a business selling their embroidered pillowcases or carved decoys can offer their wares throughout the country — but probably not if they have to figure out the tax due on every sale.”
The concern here is that large online retailers will face no problem complying with the new laws and small online retailers will struggle and possibly be forced to go out of business. Though there is little doubt that large retailers will skate by relatively unscathed, it’s worth noting that shares of Amazon (AMZN), Wayfair (W), Etsy (ETSY) and eBay (EBAY) took a dip immediately after the ruling was announced.
Questions left unanswered
There are some questions still up in the air. What about really small online transactions – should they also be taxed? The ruling does not address this issue. Also, what about retroactive sales taxes? Can the state collect sales taxes retroactively? This is also not addressed.
Life goes on. It always does. Consumers and Internet users such as myself tend to prefer the Internet to be left alone. In this instance, retailers are also in the same boat. But, what can you do? This news comes on the heels of the repeal of net neutrality. Enacting change comes down to voting and trying to effect reform on a state level. I’m sure there will be more litigation on the matter as states scramble to pass laws to enforce an online sales tax. In the meantime, consumers like you and me can only shake our heads and comply.
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