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Online Retailers Lose State Tax Subsidy

, June 22, 2018, 0 Comments

online-retailers-us-marketexpress-inThe US Supreme Court ruled today that states may require out-of-state online retailers to collect sales taxes on merchandise they sell in that state. The decision overturned its 1992 decision – Quill Corp. v. North Dakota – that had blocked states from compelling retailers with no “physical presence” in that state to collect sales taxes. At the time, two years before Amazon was founded, the internet was dogged by “worldwide wait” dialup, and the idea consumers would buy everything from shoes to couches on the internet was remote.

Up to $13 billion in 2017. Brick-and-mortar gets some relief. Consumers not amused.

The 1992 decision eventually gave a huge boost to out-of-state online retailers in that they received a consistent state tax subsidy with every sale that their in-state and local competitors – brick-and-mortar and online alike – did not receive. At first, online retail was just a minor sideshow, but after a quarter century of booming, it has become the place to be, and the squealing from all sides about the tax subsidy has been deafening for years.

It amounts to big bucks. The Government Accountability Office estimated that state and local governments could have collected between $8 billion and $13 billion in sales taxes in 2017 “if states were given authority to require sales tax collection from all remote sellers.”

In today’s decision, authored by Justice Anthony Kennedy, the Court sided with South Dakota, which had passed a law in 2016 that required large out-of-state online retailers to collect sales taxes on merchandise sold in the state. Online furniture retailer Wayfair, along with Overstock.com, and online electronics retailer Newegg sued to block the law and won in lower court.

The battle may not be entirely over, Kennedy noted, as the law could face legal challenges on other grounds.

Nevertheless, there will be a mad scramble by the 45 states that have sales taxes to try to collect sales taxes from out-of-state retailers. Many states will still have to pass laws in order to do that, so it won’t be instantaneous.

But Amazon has already lost that battle some years ago. The tide turned against Amazon when California and Walmart ganged up on it, and Amazon, after threatening to shut down part of its operations in California, buckled. By early 2017, Amazon was collecting sales taxes in all states that have sales taxes, but it was doing so only for merchandise it sells directly, not for merchandise other retailers sell on its platform.

Ironically, today’s ruling is a boost for Amazon, now that its competitors will also have to collect sales taxes. And it’s a boost for our beaten-down brick-and-mortar retailers – those that haven’t been liquidated yet – that always had to collect sales taxes and thus had to fight against out-of-state online sellers that benefited from this tax subsidy. And it’s a boost for state and local government revenues. Legislators are already licking their chops. But it’s another whack at consumers who end up having to pay for it all.

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