The Supreme Court just paved the way for broader collection of online sales taxes. That’s probably good news for Main Street and bad news for smaller online retailers. But it just might be good news for larger online retailers—especially Amazon.
The decision came in a challenge to a 2016 South Dakota law requiring any company that delivered more than $100,000 worth of goods and services, or handled more than 200 transactions, in the state, to collect and pay sales tax, regardless of where the company is located. In a 5-4 vote, the Supreme Court upheld the law, over the objections of e-commerce companies Wayfair, Overstock, and Newegg.
The ruling overturns a 1992 Supreme Court decision that retailers only had to collect and remit sales tax if they had a “physical presence” such as an office, warehouse, or brick-and-mortar store in the state charging the tax. With the physical presence rule out of the way, other states may create online sales taxes or apply existing taxes to out-of-state online retailers.
There’s a lot of money at stake. In a report last year, the US Government Accountability Office estimated that online sales taxes could raise between $8 billion and $13 billion for states and municipalities. A different report by the National Conference of State Legislatures and the International Council of Shopping Centers put the figure at $26 billion.
After years of fighting the practice, Amazon now collects sales taxes on items it sells itself in all states that impose sales taxes because it has warehouses and other facilities across the country. It also collects sales tax for third-party sellers in Pennsylvania and Washington state, but is prohibited from doing so in most other states. Likewise, Walmart collects sales tax online, thanks to its near ubiquitous brick-and-mortar stores. According to eMarketer, most of the 10 largest publicly traded online retailers are also national brick-and-mortar retail chains.
Wayfair already collects sales tax on 80 percent of its orders in the US, the company says, and that number has been increasing as its logistics footprint increases. “As a result, we do not expect today’s decision to have any noticeable impact on our business, as it may on other retailers who do not currently collect and remit sales tax,” the company says.
The decision will likely be most troublesome for smaller online retailers.
Clark Calhoun of law firm Alston & Bird points out that the Supreme Court’s decision doesn’t impose South Dakota’s $100,000 or 200-transaction threshold nationwide. Other states could charge taxes on even the tiniest online retailers for selling even one item in a state.
The burden for retailers won’t be the taxes themselves, which will be paid by consumers, but the cost of collecting them. Chief Justice John Roberts, who voted against overturning the 1992 decision, noted in his dissent that there are more than 10,000 jurisdictions in the US with varying tax rates for different items. For example, Roberts pointed to the 6.25 percent sales tax on regular deodorant in Texas, as opposed to deodorant with antiperspirant, which is not taxed, and the tax exemption for yarn earmarked specifically for sweaters in New Jersey.
That could create benefits for Amazon, which competes against the third-party sellers that list items on its site, argues Jason Goldberg, senior vice president of commerce at consulting firm Publicis Sapient. Some of those third-party sellers may not have been collecting sales taxes, but now will be forced to, effectively raising prices for consumers.
Amazon also offers a tax-calculation service to third-party sellers to help them nagivate the byzantine world of state and local taxes and collect the appropriate amounts. For the service, Amazon charges a 2.9 percent fee on the value of the taxes, so more state taxes will mean more revenue for Amazon. Other e-commerce platforms, such as Shopify, also help sellers calculate sales taxes, which could ease the burden on small online retailers.
Goldberg says Congress should step in to simplify things. For example, it could set specific thresholds that apply across the US, or set a flat rate for online sales that would be paid to the federal government and then distributed to the states.
Etsy CEO Josh Silverman echoed that sentiment in a blog post. Noting that most Etsy sellers are “businesses of one,” he said they face different challenges than large national online retailers. “We believe there is now a call to action for Congress to create a simple, fair federal solution for microbusinesses,” Silverman said.
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