Will You Soon Have To Pay Sales Tax On Every Online Purchase?

8 hours ago
Originally published on April 17, 2018 1:44 pm

Going into Tuesday's arguments at the Supreme Court, it looked as though the court was headed toward reversing a 50-year-old decision and allow states to tax all online sales.

But after the arguments, the vote on the court looked extremely close with the states looking like they could lose.

It's a multibillion-dollar dispute, and the decision will directly affect consumers, cash-strapped states and companies large and small.

On one side of the case are states, almost all of them with sales taxes. And on the other are online companies. In this case, retailers Wayfair, Overstock and Newegg. They point out that they, like many other successful online companies, are already paying state sales taxes in an increasing number of states, often because they now have warehouses or stores in many places.

Justices Sonia Sotomayor, Stephen Breyer, Elena Kagan, Samuel Alito and perhaps Chief Justice John Roberts all indicated, though, that it might be best to leave status quo and court's precedents in place and for Congress to deal with the problem of online taxation.

That's despite every justice seeming to concede that the court had been wrong in 1967 and 1992, when it barred sellers from collecting taxes from out-of-state sales.

Back then, there was no Internet.

More than 50 years ago, the justices ruled that companies do not have to collect sales taxes for out-of-state purchases. The court reaffirmed that ruling in 1992, but that was before the Internet revolutionized the economy. Now the court has decided to take another look at the issue.

When Amazon founder Jeff Bezos, at age 30, started selling books online out of his garage in Seattle, he had no idea that Amazon would become the online behemoth it is today.

"What's actually happened over the last four years, you know, I'm the most surprised person on the planet," Bezos told NPR in 1999.

So perhaps the Supreme Court can be forgiven for being less prescient in 1967 when it ruled that states didn't have to collect sales taxes on out-of-state purchases, unless the seller had a bricks-and-mortar presence within the state's borders.

By 1992, the justices were getting a little uneasy, in light of the growth of catalog sales. But they reaffirmed the sales tax decision nonetheless.

Then came the online commerce explosion. And states began to feel the pinch in terms of lost revenue from sales taxes and mom-and-pop stores being forced out of business.

As several justices noted Tuesday, the world has changed since the Supreme Court's two prior opinions, but the five justices repeatedly noted that businesses across the country have made all kinds of decisions, relying on those earlier Supreme Court rulings, and that it would be better for Congress to sort out the problem presented.

South Dakota Attorney General Marty Jackley, however, argued that states are losing "massive revenue" because local businesses have to pay state sales taxes, but online retailers do not. And that, he said, disadvantages Main Street businesses.

Justice Alito asked, if you have two options — (A) eliminate the old decisions and states can decide what taxes to collect or (B) a congressional scheme that deals with all of these problems, which would you choose?

Jackley chose option A, because Congress has had 25 years to fix this problem, and it hasn't done it.

Though Kagan was one of the five that didn't seem eager to overturn the court's earlier precedent, she agreed that it's not as if this issue hasn't been on Congress' radar screen. And it's shown that it doesn't want to legislate in this area. She said Congress had made their choice by not doing so.

Ginsburg pointed out that the conditions that existed when the old decisions came down are obsolete. Why shouldn't the court fix a decision it created, she argued.

Gorsuch wondered why the court should favor a particular business model, like the mail-order business model, rather than the brick-and-mortar model.

Greg Isaacson, arguing for the online retailers, noted that a third of states have streamlined systems to collect taxes, while two-thirds do not, and those are the most populous states, or 75 percent of the country.

Kennedy, though, said came back to the point that since there were decisions the court had made, it was something that should be corrected because those decisions turned out to be wrong, given the cyber age.

Ginsberg also asked, if the court was wrong, why shouldn't the court overturn an obsolete precedent?

Isaacson argued that if the court overturns its precedents, immediately allowing states to tax every company, that the result would be chaotic.

Ginsburg, however, wasn't buying that. She said there's enough resilience in the system to deal with it.

"Somebody get me a bill"

Forty-five states rely on sales taxes for revenue, and for those states that have no income tax, sales taxes are very important. Estimates of how much money the states are losing vary dramatically, ranging from more than $200 billion over five years to a recent estimate from the Government Accountability Office of between $8 billion and $13 billion per year.

For much of the last decade, states have been pressing Congress to fix the problem, to pass a bill that levels the playing field. But Congress, buffeted by anti-tax groups, has walked away from the issue.

"I was in D.C. about once a month lobbying this issue, and I became increasingly frustrated," said South Dakota state Sen. Deb Peters, who is also president of the National Conference of State Legislatures.

She finally lost her temper: "I basically blew up and said, 'I need a bill. Somebody get me a bill.' "

The idea was to pass a bill that required out-of-state sellers to collect sales taxes as a way to challenge the U.S. Supreme Court's prior decisions. The bill passed the South Dakota legislature, and was invalidated, as predicted by the state courts. That, in turn, enabled the state to appeal to the U.S. Supreme Court, where all indications are that at least some of the justices are ready to re-examine the old precedent.

Indeed, Gorsuch once called the current system "a judicially created tax shelter." And, in 2015, Justice Anthony Kennedy suggested he was prepared to overrule the Supreme Court's 1967 and 1992 decisions in light of modern realities.

Small businesses "getting crushed"

Amazon, the biggest of the online giants, is not part of the case. It now collects sales taxes everywhere, but only on direct purchases from Amazon, and not on purchases from third-party sellers, which account for roughly half of the company's sales.

The two sides in Tuesday's case agree on almost nothing — not the economic facts, not the amount lost in sales taxes, not even on who is hurt by the court's prior decisions. Each side contends that the other's solution will annihilate small businesses.

Main Street retailers "are getting crushed because their costs are higher than Internet retailers," said lawyer Eric Citron, who represents South Dakota.

Small retailers even have a name for what happens. It's called "show-rooming." People come into a Main Street store, ask to look at particular products, and then buy the one they like online because the price is 5 to 10 percent cheaper without the sales tax.

Plus, Isaacson argued, "This issue of collection of sales taxes is really a self-correcting problem."

What's taxable? Every state is different

Countering that argument is Andrew Pincus, who represents eBay and small business sellers that operate on eBay platforms. He calls the idea of leveling the sales tax playing field a "business killer."

"The reality is that these [online] small businesses are just going to go out of business, because they can't absorb the costs," he maintained.

In short, his argument goes, given the fact that there are roughly 12,000 tax-collecting state and local jurisdictions in the country, small and medium-sized online businesses will simply not be able to afford to set up the systems needed to calculate sales taxes.

Peters, however, counters that "the idea that this is too complicated is absolutely laughable to me because businesses are doing it today."

As an accountant, Peters' clients are often mom-and-pop stores. "I set up businesses on software every day where they can collect and remit on their sales," she said, adding, "whether it's in South Dakota or Florida."

Citron added that "it's all managed by algorithm."

Indeed, 24 states, representing 30 percent of the population have already agreed to a system that that provides the software for free.

However, on the other side, eBay's Pincus said the more populous states like New York and California have complicated rules for which objects are taxable, and at what rate.

"Just to give a few examples," he said, "in Minnesota blankets are taxable, but baby receiving blankets are not taxable. In Texas, deodorant is taxable, but deodorant that has an antiperspirant is not."

The cost for a system that deals with these variations, he said, can be $200,000 up front.

While both sides in this debate agree that it would be best for Congress to deal with all these issues, the fact is that Congress has turned a blind eye. And that, for now, leaves it up to the Supreme Court to decide whether it wants to stick with the rule it established a half century ago when the marketplace was a very different place, or not.

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