For those who believe in tax fairness and simplification, the U.S. Supreme Court ruling Thursday in South Dakota v. Wayfair on online sales taxes is a good outcome.
Previously, sales tax was collected on online purchases only if the online seller had a “physical presence” (property or employees) in the state, based on Supreme Court rulings in 1968 and 1992. At the time, the Supreme Court found that myriad state tax rules make tax collection costly and tricky for multistate businesses. But if states simplified their rules, or if Congress passed a uniform law, that might be different.
However, with online retailers now a healthy and growing share of American retail, states have become more aggressive in trying to get online-only businesses to collect taxes. Thirty-one states, in fact, have a law on the books applying sales taxes to online sales that stretch the meaning of physical presence or ignore it altogether.
Some have argued that making all retailers collect sales taxes would amount to a new “tax on the Internet.” On the other hand, many advocates for state collection authority argue that technology has essentially eliminated the collection burden. Both claims are false. These taxes are already owed and just aren’t often being collected. And state taxes remain complex, with the Government Accountability Office estimating potential compliance costs well into the hundreds of millions of dollars annually. If states don’t simplify their tax systems, those costs will be passed on to consumers.
The South Dakota v. Wayfair ruling struck an appropriate balance, recognizing states’ interests in applying their sales tax equally, but acknowledging that state sales tax rules are a mess that could still burden interstate commerce.
South Dakota’s law is uniquely simple and includes an exemption for smaller sellers, thereby minimizing the interstate commerce impact of compliance. This ruling is clearly not a blank check for all states. Other states seeking online sales tax collection authority should craft their laws accordingly.
Now that the Supreme Court has thrown out the physical presence rule, Congress may finally have reason to act. Prior attempts at passing federal legislation have failed. One option still out there includes the Remote Transactions Parity Act, which would let states collect if they agree to adequately simplify their sales taxes and cover the cost of compliance. Some favor instead an “origin sourcing” approach offered by retiring Rep. Bob Goodlatte, R-Va., which would base the tax on the business’ location and not the customer’s, turning a consumption tax into a business tax. The RTPA represents a much more workable and legislatively viable option.
Joseph Bishop-Henchman is executive vice president of the Tax Foundation. John Buhl is media relations manager at the Tax Foundation.
