Supreme Court to Decide Whether to Allow Sales Taxes for Online Purchases

The Supreme Court will soon rule on whether to scrap the 1992 law that requires retailers to collect sales tax from residents of a state if the retailers have any physical presence in that state. The court will consider creating an entirely new system of sales tax collection from retailers.

Critics of the current system include states and local governments as well as large retail chains. Governments say the law has improperly barred them from collecting billions of dollars in sales-tax revenue from online retailers. CNN reports that retail giants Amazon and Walmart already collect sales tax in the 45 states that have sales tax laws enacted. The National Retail Federation argued in a brief it filed in the case, “The current tax system favors online retailers over brick-and-mortar businesses, and undermines fair and open competition in the marketplace.”

What Could This Mean for Consumers?

A reversal of the law could mean that smaller businesses (those without physical presences in many states, like Amazon) will start collecting sales taxes on all online purchases, increasing the price for goods that consumers buy online. The Supreme Court last ruled on this issue in 1992, holding that Illinois and North Dakota could not levy sales taxes from sellers with no presence in those states, online shopping was not nearly as extensive as it is today. Now, consumers do nearly 10 percent of their shopping online, a number that will likely grow even greater in the future.

NBC reported that the Court assessed the size of online sales was minor compared to in-store sales, and that companies would “face too big a burden in having to figure out the correct sales tax, given widely different rates around the company.” A South Dakota law passed in 2016 now requires online retailers who have a physical presence in that state to collect sales tax if they sell over $100,000 of their product.

Justice Sonia Sotomayor expressed her grievance with allowing states to collect sales taxes. On top of creating an easy pathway for lawsuits, Sotomayor said that is the state’s responsibility to make their citizens “pony up” sales tax.

Sotomayor said in her conversation with the attorney general of South Dakota “It’s not the merchants that pay the tax, it’s the consumer.” According to CNN, because of the difficulty of tracking sales, states have had trouble enforcing taxes on consumers. Justice Ruth Bader Ginsburg pointed out, “In the real world, it’s much more likely to yield funds if you go after the seller than if you go after the consumer.”

Legislative Attempts to Tax Online Sales

The closest the U.S. has come to a national system mandating universal collection of sales taxes was the Marketplace Fairness Act. The Senate passed this bill in 2013 (S. 743) but it did not make it out of a House committee; the Senate tried again in 2017 (S. 976), and that time the bill did not make it out of a Senate committee.There was an attempt to attach the Marketplace Fairness Act or a similar bill called the Remote Transactions Parity Act (H.R. 2193) to the March 2018 omnibus spending bill, but that did not come to fruition.

The Marketplace Fairness Act and related bills would enable state governments to collect sales taxes from remote retailers with no physical presence in those states. The Tax Foundation found that consumers pay sales taxes, but they are usually collected by retailers at higher cost.

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