Tomorrow’s the big day for retailers and shoppers concerned with online sales tax collections. The Associated Press reports that retailers are looking for clarity and certainty.
Retailers are hoping for a resolution this year from the Supreme Court, which hears arguments Tuesday in a decades-old dispute: Whether companies must collect sales tax on items sold in a state where they don’t have a store or other building.
If the court backs government officials who say they’re losing billions of dollars in uncollected taxes, thousands of small companies could be forced to start charging their out-of-state customers for them. Some businesses fear that could alienate customers used to tax-free shopping. On the other side: Retailers who do collect sales tax and believe those who don’t have an unfair advantage.
When we wrote of the upcoming hearing last November, we noted that one national authority says Washington’s tax on remote sales is “the one to watch.” We said
The Washington Research Council’s brief on the state budget stated last year, lawmakers passed legislation in 2017 that
Requires remote sellers (sellers without a physical presence in Washington), referrers (people who list or advertise items for sale for a seller and receive a commission) and marketplace facilita- tors (people who contract with a seller to facilitate the sale of items through a marketplace) to either collect and re-mit sales taxes or comply with notice and reporting requirements to the cus- tomer and the Department of Reve- nue. This is not settled law at the federal level—see our report, “Washington’s Steady Move to an Economic Nexus Standard for Taxes”
Geek Wire provides a good FAQ on the issues. For example,
What does this mean for consumers, small businesses and big online retailers like Amazon?
For shoppers, the potential outcomes are simple. If South Dakota wins, it basically marks the end of sales tax-free shopping online, according to Avalara’s [Scott] Peterson, [vice president of U.S. Tax Policy and Government Relations].
“Within just a very short time — three or four years — every state will have all these laws and every merchant will effectively be collecting everywhere,” Peterson said. “Consumers won’t be able to shop tax free anymore.”
Even if the Supreme Court rules in favor of the retailers, tax-free shopping is likely on the way out in the near future, Peterson argues, thanks to a variety of laws passed by legislatures to compel businesses to collect sales taxes and allow states to do it themselves if retailers don’t.
The AP writes a decision could come quickly.
The justices are likely to rule by June on whether to overturn a 1992 decision, Quill v. North Dakota, that said companies cannot be forced to collect sales tax from customers in a state where they don’t have a physical presence, such as a store or distribution center. Collecting tax from online sales hasn’t been a question for big online retailers like Walmart or Macy’s since they have physical stores in most or all states. They also have accounting systems and financial staffs to handle the work.
Small retailers have software options to help collect taxes and do the administrative work, but it’s an added cost. Whether it’s worth it may depend on how much revenue a seller gets from other states.
RouteFifty has this brief background on the precedents
Two previous Supreme Court decisions provide key legal underpinnings for the physical presence rule. The most recent was the 1992 decision in Quill Corp. v. North Dakota. It reinforced a ruling in the 1967 case National Bellas Hess v. Department of Revenue of Illinois.
Quill and Bellas Hess both focused on companies with mail order, catalog sales operations. One of the amicus briefs filed in the Wayfaircase points out that the Quill ruling was issued about two years before the world’s first secure retail transaction took place over the internet.
Online retail has evolved dramatically since then. U.S. e-commerce sales during 2017 checked in at an estimated $453 billion, according toU.S. Census Bureau figures. That total marked a 16 percent increase from the year prior. But e-commerce still only accounted for about 9 percent of the nation’s overall retail sales in 2017.
Keeping up with the times has been challenging for all parties involved. For state and local governments, the fiscal consequences are clear, as RouteFifty points out.
A report the Government Accountability Office issued last November estimates state and local governments could have gained $8 billion to $13 billion in 2017 if states had the authority to require sales tax collections from all out-of-state “remote sellers,” like online retailers.
GAO says those amounts are equal to between 2 percent and 4 percent of total state and local revenues in 2016 from general sales tax and gross receipts tax—a tax similar to sales tax.
And, to clarify:
The companies in the Wayfair case highlight GAO findings that indicate states already receive tax on between 87 percent and 96 percent of sales by the top 100 online retailers.
Amazon, for instance, now collects and pays sales tax in all states where the tax is imposed—though the company does not do this for sales by third-party vendors using its platform. Wal-Mart, another big player in online retail, is on the hook for the taxes from its internet sales in states where it has stores and other facilities.
As high-stakes tax debates go, this is as big as we’re likely to see for some time. Too bad they don’t televise U.S. Supreme Court hearings.