On June 21, 2018, the Supreme Court ruled 5-4 to overturn a 1992 decision, Quill v. North Dakota, which allowed states to require retailers to collect sales taxes only if those retailers maintained a physical location within the state.
The court ruled that states can now require online retailers to collect sales taxes. According to the South Dakota Department of Revenue, South Dakota loses an estimated $48 billion to $58 billion dollars each year, and the 50 states as a whole loses upwards of $33 billion. South Dakota, however, does not charge an income tax, which means their reliance on sales tax is substantial.
The ruling has the potential to harm small online retailers, who will have to comply with “more than 10,000 taxing jurisdictions across the country. South Dakota Governor Dennis Daugaard argues that the decision creates a “level playing field” for all businesses, particularly heightening competition between local retailers and online retailers. Dissenting opinions noted that some states require additional taxes based on ingredients in certain products, which can be hard for small online retailers to keep track of and enforce.
Two directives were given out in the decision that provides a framework for states implementing taxes on online shopping:
- “State regulations may not discriminate against interstate commerce.”
- “States may not impose undue burdens on interstate commerce.”
States are mostly left to decide for themselves how they want to implement the tax collection, which is concerning for some online businesses like Overstock, and many online businesses saw declining stock prices in the wake of the decision. Amazon, however, has been collecting sales taxes already. In a statement to CNBC, John Swain, a law professor at the University of Arizona, believes “Amazon should be helped because it is collecting sales tax in every state, while it is the Wayfairs of the world who are directly hurt.” Amazon already dominates the online shopping market, and competitors fear they will struggle to compete with the taxes.
Some issues may arise with Amazon. The online retail giant may claim tax exemption since it is a third-party seller for half of its products, adding a grey area as to whether or not they should collect taxes. So far, states have been split on how to enforce taxes on Amazon. Washington, Pennsylvania, and Minnesota require online retailers to collect sales tax on behalf of any third-party sellers. Other states require the opposite.
Sites like Etsy and eBay face a unique problem because they have third-party sellers that are individuals. This decision could have a significant impact on the market for these smaller transactions between individuals through these sites trying to compete. Both companies stated that while the Supreme Court did acknowledge the difference between small and large retailers, the decision, as it stands currently, sets no blanket standard as to how the ruling ought to be implemented, which Congress must decide, despite refusing to take action since the 1992 case.
For consumers, the ruling is less clear. Some claim that the decision helps consumers by increasing competition between local and physical retailers and online retailers. Others, like Neil Saunders, of research firm GlobalDataRetail, estimate consumers could be paying “as much as $15.2 billion a year in additional taxes.”
Either way, prices are going to go up for consumers. Office Depot CEO Steve Odland said “There is a chance here that it raises prices for consumers by passing on the tax increase. In some cases, the sales tax numbers are 7 or 8 percent, and you would expect to see that passed through.”