All eyes have been on federal tax reform, so it’s easy to miss a major upcoming case in the Supreme Court that would affect many of the more than 100 million Americans who shopped online this holiday season.
Under current Supreme Court precedent (Quill v. North Dakota), many online retailers are not required to collect sales taxes where they have no physical presence in a state, as opposed to their brick-and-mortar counterparts. Traditional retailers feel they’re at a competitive disadvantage, and states argue that they’re losing billions of dollars in revenue. These are valid concerns, but we shouldn’t lose sight of the legal foundation for protecting interstate commerce from the costly administrative rules that states could impose on businesses around the country.
In South Dakota v. Wayfair Inc., the court is being asked to take up a direct challenge to the physical presence requirement. The court will begin considering whether to take the case on Jan. 5. As the Tax Foundation explained in a recent amicus brief, South Dakota is one of the few states that taxes most of all goods and services, making it much easier to administer. The state has also been a longstanding member of the Streamlined Sales and Use Tax Agreement, a group of 23 states that has worked to simplify and standardize their sales tax rules. Unfortunately, many other states have much more complex sales tax systems.
Internet giant Amazon is often the focus of this debate, but online retailers come in all shapes and sizes, so we need a solution that accommodates all e-commerce. There are 10,708 jurisdictions in 45 states that impose a sales tax. As it was expanding its operations, Amazon went from collecting taxes in five states in 2011 to collecting taxes in all 45 sales tax states today. No doubt, they have the resources to navigate the labyrinth of state rules.
But right now states are ignoring the Quill decision, and without action by the Supreme Court or Congress, states will continue to impose a harmful, complex patchwork of laws on online retailers of all sizes.
There are myriad examples of the idiosyncratic rules states use. Maryland requires vendors to round up remainders of four and up, rather than the more common practice of rounding up at five. Wisconsin has a revenue circular describing 10 ice cream cake sale scenarios, of which six are taxable and four are nontaxable. A drug store customer in Chicago will pay different sales tax rates on bottled water, soda, candy, and groceries.
E-commerce is still evolving. Amazon not only fulfills its own direct sales, but also acts as a platform for small businesses that want access to Amazon’s customer base. With Amazon’s third-party sales growing, states are now turning their attention to asserting taxing authority over other sellers using Amazon’s platform. Forcing the Amazons and eBays of the world to collect taxes on behalf of their users seems like an easy solution. But policymakers are ignoring that even though both companies have the technical know-how to manage things, these compliance costs will get passed onto smaller businesses using their services. In the end, we’ll all pay more to buy things online unless more states pursue common-sense reforms.
If the Supreme Court takes the Wayfair case, it could be the first step in setting national guidelines for other states to follow. South Dakota recently passed a fairly well-structured law, imposing a sales tax on all online sales but exempting occasional transactions, barring retroactive collection, and simplifying its state tax code to make compliance easier.
South Dakota’s highest court ruled that the new law violates the Quill decision, but I’m not so sure. Our Constitution was adopted in large part to prevent states from exporting their tax burdens, subjecting interstate commerce to death by a thousand cuts while lining their own pockets. South Dakota’s law respects interstate commerce and respects physical presence, since only the state’s own residents will owe tax.
Whatever one thinks of the South Dakota law, the dispute gives the Supreme Court a good chance to set a standard for state taxes on interstate commerce. Courts will soon be asked over and over to consider challenges to a flurry of problematic state tax laws that are much more complex than South Dakota’s. Each could harm the national economy in various degrees. We at the Tax Foundation are not partisans for expanded state tax power. But unless the Supreme Court or Congress take action, that’s what we’ll have.
Joseph Bishop-Henchman (@jbhenchman) is the executive vice president at the Tax Foundation in Washington, D.C.
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