The US Supreme Court starts hearing arguments today on a case that could reshape e-commerce
Today, the US Supreme Court starts hearing arguments for a monumental case that could determine whether or not e-commerce companies are required to charge state sales tax respective to the state in which the consumer is located.
In South Dakota vs. Wayfair Inc., the plaintiff is asking the court to consider overturning a two-decades-old ruling that allows online sellers to avoid collecting sales tax in states where they have no physical presence.
Should the law be changed, any state would have the ability to tax online purchases made by residents – even for purchases made outside its borders. The change is expected to raise prices for consumers who shop online.
The precedent for the case is drawn from the revenue states are missing out on thanks to consumers’ comparative shopping habits. It’s become common for consumers to enter local brick-and-mortar stores, browse products in a certain category, and search online for lower prices than the store offers. Without the addition of sales tax, which would be charged in many states’ physical retail locations, consumers are then left with the burden of shipping costs, which are often waived by e-commerce retailers.
The Trump Administration backs South Dakota promoting sales tax for e-commerce sellers
The US Supreme Court last drew the lines on tax structure in the Quill Corp. vs. North Dakota case in 1992. The Trump Administration argues that the decision was made at a time when no one knew how quickly e-commerce sales would skyrocket. Given huge margins, Trump says it’s time for new policies that tax sellers to contribute to state economies.
E-commerce sales in the fourth quarter of 2017 increased to $119 billion, up more than 3% from the previous quarter and nearly 17% from a year earlier, according to U.S. Census Bureau data. The online sales comprised more than 9% of total sales in the U.S.
“In light of internet retailers’ pervasive and continuous virtual presence in the states where their websites are accessible, the states have ample authority to require those retailers to collect state sales taxes owed by their customers,” U.S. Solicitor General Noel Francisco said in a friend-of-the-court brief.
The South Dakota governor has said the state loses out on an estimated $50 million a year in sales tax that doesn’t get collected by out-of-state sellers.
Taxing Amazon and Ebay third-party vendors would hurt the economy
Amazon and Ebay’s SMEs are often cited as an example of small retailers that could suffer from changes to the current tax structure. While Amazon already collects sales tax on products it sells, its small vendors do not.
“The issue is just whether they also collect sales taxes on third-party Amazon vendors,” according to Chris Edwards, director of tax policy studies at the Cato Institute and editor of DownsizingGovernment.org. “Imposing taxes on them would add a large compliance burden – especially to small e-tailers – that would harm the economy.”
However, since 2017, Amazon has been collecting sales tax in every state that charges it. Instead, a change in the rule will really affect third-party sellers that use Amazon to sell products. In fact, SMEs that sell online say getting rid of the rule could drive them out of business.
“For small businesses on tight margins, these costs are going to be fatal in many cases,” said Andy Pincus, who filed a brief on behalf of eBay and small businesses that use its platform.
Despite Trump’s backing the state of South Dakota, there’s no indication which way the court will decide. Three Supreme Court judges – Neil Gorsuch, Clarence Thomas, and Anthony Kennedy – have suggested they are willing to rethink the original ruling.