The Supreme Court has ruled that states can force online businesses to pay sales taxes even if they do not have a physical presence in the state.
President Donald Trump is pleased with this decision and stated, it is a “great victory for consumers and retailers.”
The ruling reverses two Supreme Court decisions from decades ago. The rulings decided that states could not require retailers to collect and remit sales taxes if those retailers were not physically located in the taxing state.
Before the internet this was logical. Offline tax collection was a complicated burden, especially since sales tax is levied not just by states but municipalities. Besides, customers did most of their shopping at brick-and-mortar stores.
However, online retail grew exponentially, and technology helped to make tax compliance easier. Thus, the previous Supreme Court decisions created a growing tax loophole: shop at the corner store and pay sales tax, buy online and avoid it.
The current Supreme Court decision allows states to close that loophole and will lead to a more rational tax system, which will be good for the public.
The majority of sales taxes are “sales and use tax,” because consumers generally have a legal obligation to report and pay any use tax when sales tax is not collected on a sale.
With the exception of some large-ticket items like cars, it was difficult to enforce the use tax and consumers are not even aware they are supposed to pay it.
As online retail has continued to grow, states have increasingly sought clever ways to force out-of-state sellers to collect sales tax where they know their own residents are unlikely to pay the use tax.
Ohio has taken this a step further and asserted that online retailers have “presence” in the state that obligates them to collect taxes if they put cookies on the consumers’ computers. This claim, however, is still tied up in court.
The largest online players like Amazon have had to establish true physical presence with warehouses. This required them to collect taxes in virtually all states.
However, large gaps remained. Amazon collected tax on their own sales, but generally not on third-party sales through the Amazon Marketplace. The system became messy.
The current Supreme Court decision provides a way to clean up the messiness. States can now require sellers to collect and remit sales tax, regardless of physical presence. This is required as long as the states take specific steps to minimize the burden of compliance on out-of-state sellers.
A sales tax is a broad tax on consumption: Purchase something, use it, pay tax. When there is a way for people to avoid the tax, their behavior becomes distorted and there is a reduction in tax collection. This means either the government has to cut back on services, or it has to raise taxes on something else.
Since the 1970s, tax rates around the nation have gone up a couple of points, however, sales tax collections have remained flat. This is because more and more of the country’s spending has been on things that are not taxed – the economy is shifting away from taxed goods, but also because of the online sales tax loophole.
The current Supreme Court ruling will create a more level playing field for retailers. It will also make it easier for governments to continue to finance themselves through sales tax.
Due to the Commerce Clause of the Constitution, states are required not to discriminate against the unduly burden out-of-state sellers.
For example, South Dakota provides software to out-of-state retailers for free. This will help them comply with the state’s sales tax. The state only has one agency that collects taxes, therefore, retailers do not need to deal with city or county tax departments to remit local sales tax. South Dakota is also a member of the Streamlined Sales and Use Tax Agreement (SSTA). It is an interstate compact of 21 states that have agreed to adopt uniform rules about a variety of aspects concerning their sales tax.
Joe Henchman runs the state tax policy project at the Tax Foundation, which is a conservative think-tank that supports the Wayfair decision. Henchman had been talking with officials from other states that are looking to tax online sales in a way that complies with the Supreme Court ruling.
“If you want to be absolutely sure that your statute is valid under these rules, you should try to emulate South Dakota as much as possible,” according to Henchman.
Only half the states that levy sales tax are parties of the SSTA. Large states have been reluctant to join because they have flexibility in customizing sales tax rules that must be given up. However, the promise of additional revenue from sales taxes online, may entice more states to join the SSTA.
There are a variety of estimates floating around stating how much more sales tax revenue states could collect if the enact the same laws as South Dakota.
Economists Donald Bruce, William Fox, and LeAnn Luna put together one estimate. As of 2015, the figure was determined to be $17.4 billion and rising. Henchman believes the real figure is half that number. This is based on his analysis of the experience of the states, as they have succeeded in taxing a larger fraction on online sales the past few years.
Closing the online tax loophole would be enough to boost taxes by one-half of one percent of $1.6 trillion collected in taxes. That would go quite the distance toward closing a budget gap of a few percentage points.
It is important for a tax system to be more than adequate. Revenues should grow in pace with the economy, therefore, the government can maintain pace with the demand for services and the economy continues to grow.
States have faces a variety of problems over the decades with tax inadequacy. Sales taxes have eroded, property taxes have experienced political pressures, taxpayers have revolted against increases in the inflexible tax, voting to impose caps that in some sates have kept revenue growth far below economic growth.
Raising sales taxes hurts the economy, and because sales taxes focus predominately on good, they take a larger bite out of the wallets of low-income Americans. Income taxes are more progressive, but when they are raised it hurts the economy as well. “Income tax revenue volatility in recessions has worsened the severity of state budget crises,” according to Business Insider.
The current Supreme Court ruling allows for states to raise more sales tax revenue without raising taxes. This is an outcome that will be good for the economy and for the people who rely on services from state governments – everyone.
By Jeanette Smith
Business Insider: The Supreme Court decision that will put more taxes on internet sales is good news for you