A New Avenue for State and Local Taxes
Americans love shopping online, in large part because of lower prices. Online merchants offer lower prices because they have a lower overhead compared to traditional brick-and-mortar retailers – and they also enjoy a sales tax advantage.
A 1992 Supreme Court decision prohibited states from requiring businesses to collect sales taxes on online purchases by state residents unless the business had a physical presence in that state (such as retail outlets).
Traditional retailers have cried foul for years, claiming that the growth and ease of online commerce has put them at a significant disadvantage. State governments have also complained about growing tax revenue gaps as online purchases take up a larger percentage of all retail sales.
Last week, the Supreme Court reversed course. In a 5-4 ruling, the Court upheld a South Dakota law requiring any merchant, online or otherwise, to collect and remit a 4.5% sales tax if they conduct more than 200 transactions in the state or have more than $100,000 in annual sales.
The decision is a win for state and local governments – assuming they rewrite their tax laws to take advantage – and a loss for consumers. It's a mixed bag for merchants, depending on each merchant's business model and how state and local tax laws are modified.
Get Ready to Pay More
State and local governments are looking at potentially huge payouts. According to data from the U.S. Census Bureau, e-commerce accounted for over $450 billion in sales in 2017 – representing 13% of total retail sales. Amazon alone brought in $119 billion in online revenue. Justice Anthony Kennedy estimated that states are losing up to $33 billion in annual tax revenues because of the massive growth in online sales and the limits of the 1992 decision.
Put another way – Americans will soon be paying up to $33 billion more each year for online purchases.
We've already been paying some of these taxes. Major online retailers like Amazon have been collecting sales taxes where applicable. Others, such as Wal-Mart, have a physical presence in virtually every state and must charge sales tax under existing law. Even Wayfair, one of the defendants in the Supreme Court Case, already collects sales tax on 80% of orders.
However, Amazon may still be affected by tax law changes. Approximately half of Amazon's sales are for goods posted by smaller third-party merchants.
Smaller online retailers will be hit hardest, as they will be faced with a constantly changing set of tax requirements without sufficient resources to handle them. Tax compliance software will need multiple upgrades and regular monitoring – a snap for the Wal-Marts of the world but an intolerable cost and challenge for smaller retailers that fall beyond state exemption guidelines.
Only 10,000 Changes to Consider
Currently, only five states don't collect state sales taxes – Alaska, Delaware, Montana, New Hampshire, and Oregon.County and/or municipal sales taxes are allowed by 38 states, including Alaska and Montana.
State and local governments that do collect sales taxes have been trying to find ways to recoup lost online sales taxes for years, resulting in a confusing tangle of tax laws. For example, in over twenty states the definition of "physical presence" for state tax collection includes the presence of affiliated websites.
Consider that, as of 2017, there were roughly 10,000 different sales tax jurisdictions in the U.S. Sales taxes change all the time – but the Supreme Court decision is likely to produce a massive wave of changes affecting almost all jurisdictions.
The Court's reasoning was aimed at larger online retailers, and the written opinion acknowledged that some limits or exemptions should apply. By leaving this up to Congress and the states and failing to address the possible retroactive collection of sales taxes, the Court has set up a potential tax nightmare for small businesses that could force some out of business.
That's the retailer's problem, not yours – unless you're an affected online retailer, or work for one – or if you purchase that retailer's goods because of their low prices.
On second thought, it's your problem, too.
If you sell items online – whether it's part of your small business or supplementing your income through selling items on sites like Etsy or eBay – you must pay close attention to tax law changes across the nation as well as in your state. Many state legislatures will enact laws to take advantage of the Supreme Court's decision, and implementation is likely to be drawn out, uneven, and confusing.
Undoubtedly, sites and services will pop up to help you through the transition period and determine whether you're exempt from a particular state's tax law. Seek whatever help you need to make sure you comply.
As a consumer, within a few months you're likely to pay more for some of your online purchases, especially from smaller retailers.
You can't do much about sales taxes, but you can control your shopping habits. The same strategies that you already use to save money still apply. With shrewd use of comparison shopping, sales, coupons, rewards programs, and other money-savings tactics, you can blunt the effects of paying extra for some of your online purchases.
You may end up purchasing fewer items online and more items at local retailers – but is that such a problem? It's certainly not if you work for one of them.
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