In an increasingly protectionist America, the battle between e-commerce and state taxes is heating up. Why is this the case? Historically in America, property tax has provided the greatest source of revenue for local and state government initiatives, followed by sales tax. Local and State Governments use sales tax for initiatives that benefit the common good, such as infrastructure – roads, metros, buses, and trains – and public schools. As more goods are purchased online, the amount of sales tax collected in relation to consumers’ income base has steadily decreased. That means less money for public initiatives, but more money for consumers and e-commerce vendors to spend and collect.
Last Monday, President Trump announced that states should have the right to mandate that online retailers collect sales tax in an initiative to recoup the public funds lost via e-commerce. The historical precedent for the current tax law is a 1992 Supreme Court ruling called Quill Corp. v. North Dakota that upheld that companies with no physical presence in a state were not required to collect state sales tax on purchases. E-commerce retailers involved in the dispute included Wayfair, Overstock.com, and Newegg Inc., an online computer and electronics store, while virtually every major e-commerce retailer has been affected.
Over twenty five years have elapsed since the Supreme Court Ruling, and many lawmakers, state and local officials are arguing that the law no longer makes sense in today’s consumer ecosystem. It is estimated that local governments could gain US$8 billion to 13 billion in annual revenue if they required e-businesses to collect sales tax – a considerable amount of funds for public use. To address the issue, the Department of Justice filed a brief with the Supreme Court saying that the decision may need to be overruled.
Solicitor General Noel Francisco stated in the brief, “A physical-presence requirement bears no logical relationship to current economic conditions, and imposes intolerable burdens on the states’ ability to collect tax revenue they are lawfully owed.”
The US Supreme Court is set to hear the case in April 2018, and its decision may affect the habits of millions of Americans. While Amazon already collects state sales tax, many other retailers and e-commerce SMEs do not.
How tax laws may affect e-commerce sellers
“Marketplace Facilitators” laws have prompted some e-commerce giants including Amazon and Etsy to collect sales tax for their sellers in the state of Washington, and analysts expect the same to happen in Pennsylvania. These state laws require that marketplace facilitators – or the platforms that facilitate e-commerce – must collect sales tax on goods purchased by the state’s residents.
While the continued decreased in public funds is apparent, the unwieldy nature of e-commerce transactions poses a huge challenge for state officials. Even if such regulations are passed, e-commerce sellers would have to stay on top of tax laws for each different state to properly comply – which is why many are holding platforms accountable for the improper taxation of their sellers.
But that doesn’t mean sellers should stick their heads in the sand. According to TaxJar Massachusetts required Amazon to give the state information about sellers who use its Fulfilled By Amazon service to keep track of money owed to the state. The state of Rhode Island also required Amazon to divulge information about its sellers tax compliance, although not limited to sellers that use FBA.
The Supreme Court will hear arguments on the South Dakota appeal in April and is set to make a decision by the end of June. But the Supreme Court has also noted that Congress does not need its ruling to make a federal mandate on the requirement of states to tax e-commerce sellers. As the Trump Administration continues its efforts to keep American revenue on its home turf, e-commerce sellers should expect debate around taxation to continue and keep an eye on regulations that may affect their businesses.