Online Shopping Sans Sales Tax? The Supreme Court Reverses Its View

By Savannah Green (CMC ’20)

In June of 2018, the Supreme Court ruled in favor of the defendant in Wayfair v. South Dakota regarding online sales tax. Prior to this case, the law did not allow states to collect sales tax from online stores unless said stores owned a physical property in the state. The precedent came from a 1992 case, Quill Corporation v. North Dakota,  that had long given online stores the upper hand in attracting customers with lower prices compared to storefront retailers. This new ruling allows states to collect sales tax from any online retailers that are selling to those within their states. This has generated a polarized backlash across customers and retailers, domestically and abroad.

Since online sales have been on the rise in recent years, states will benefit greatly from the ruling allowing them to tax said transactions. Contrarily, the new online retailers that are based in the United States are understandably unhappy; they will now pay sales tax on physical and online purchases, alike. In turn, these retailers will be forced to examine each individual transaction and pay that state accordingly. This process will be both time-consuming and tedious for these companies. Additionally, this ruling favors international retailers more than domestic companies. It would be extremely difficult for states to track down the sales tax from companies overseas. Therefore, the international companies will be able to continue to sell their products at lower prices by evading sales tax. Some economists are worried this decision will slow or even stop the economic boom that online shopping has created in the United States.

Although this finally puts online retailers on the same playing field as brick and mortar shops, online startup companies are in trouble. This new rule will make breaking into the market and becoming successful much more difficult for any startup. Likely, many entrepreneurs will be discouraged from attempting to start an online company given this new disperse taxation system. Many are asking the government to encourage these entrepreneurs by creating tax breaks or other incentives. Larger companies such as Amazon will likely increase their monopolization of the market since they have the financial ability to adjust to such a change. Furthermore, Amazon has already been paying sales taxes in most states since they have warehouses across the United States. Other smaller retailers are frustrated with this ruling, as it benefits large, established U.S. companies and international companies instead of new, fresh, domestically-owned small businesses.

When the Supreme Court ruled on the 1992 case, the estimated losses in sales taxes were substantially lower than they are today, a key factor in the differing ruling for the 2018 case. In 1992, states were estimated to be losing between $694 million and $3 billion annually. Today, the loss is estimated between $8 billion and $33 billion. Much of the ruling’s logic relied on the necessity for taxes within each state in order for the state government to carry out projects that benefit the lives of their citizens. One example is repairing roads. Online retailers use delivery services to bring goods to customers, yet without sales tax on those retailers, the roads are being used for free, spreading other funds more thinly. Additionally, a key clause in the ruling explains that states can only tax online entities that have a substantial connection to the state. This phrase will need to be assessed on a case-by-case basis, but this might be the leeway new entrepreneurs are looking for to break into the market. The requirement is that companies need to bring in $100,000 in goods or services or participate in at least 200 separate transactions of goods or services into the state to reach the threshold of “substantial connection”. There will likely be much litigation that is decided over the coming years to polish this phrase up.

Supreme Court decisions like this are extremely important because of the impact they have on every level of the market. States have the opportunity to now decide which retailers they choose to tax and at what rate. This legal loophole may prove to be a problem for states, especially with their varying economic prospects. There is a real possibility that a company could be charged sales tax in one state but not in another, which will make the company’s job harder since the company will have to distinguish between each state to follow that state’s policies. Although this ruling will create a large corporate headache for many online companies as they decipher the varying amounts of sales tax that are required by each level of government, the hope of the Supreme Court is that the state governments—and the citizens within them purchasing these goods—will benefit greatly from the extra revenue. It will take time to make clear all the implications of this decision, but the outcome—at least for now—seems positive, if handled with great care.

The Court ruled that states could require retailers to collect state sales tax on online-only transactions, allowing states to collect more tax revenue but possibly leading to more expensive online shopping for consumers.

In this decision the Court overturned a rule that states could only tax online transactions from stores that had a brick and mortar presence in that state. Retailers like Wayfair and argued that allowing every state to collect online sales taxes would be overly complicated, but the Court said it caused too much confusion to make rules based on physical stores in an increasingly online retail economy.

The decision could mean that online shopping will get more expensive for consumers if they shop at retailers that don’t already collect state sales taxes, but could also bring in up to $13 billion in tax revenue for states that previously could only tax stores that had a physical presence in that state.

Some business groups say the ruling will level the playing field between online retailers and small local businesses, but others argue that it could hurt smaller online stores that don’t already collect state sales taxes.

Amazon had initially challenged the idea of paying state sales tax but now collects sales tax in every state that requires it, in part because Amazon has warehouses in so many states. For that reason, some speculated that Amazon would prosper from the ruling since it will mostly hurt smaller online retailers like Wayfair. But it will hurt startups even more.


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