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Michael Swartz / Jun. 22, 2018

Internet Taxes: Killing the Golden E-commerce Goose?

The Supreme Court's ruling allowing taxation of Internet sales will cost consumers a lot.

As the scope and reach of online commerce has increased over the last decade, the business world took its taxation guidance from a 1992 decision by the Supreme Court that held a business had to have a physical presence in a particular state in order to be obligated to collect state and local sales tax. The Quill v. North Dakota ruling, originally sought by a mail-order company, was also construed to allow online retailers to be exempt from collecting sales tax on out-of-state purchases. Those days are over.

One entity that initially took advantage of Quill was Amazon. As its distribution network grew, however, it began to collect sales tax in those jurisdictions that have them. It was, after all, plenty big enough to accommodate the burden. The same held true for Walmart as its online sales picked up. Both these entities joined a lobbying group demanding Congress address the disparity between items bought online and purchases made at brick-and-mortar stores. The laughable legislation that resulted was called the Marketplace Fairness Act. Fortunately, the MFA has never made it all the way through Congress despite a supportive president.

When retailers learned that Congress wouldn’t do their dirty work, they prevailed on states to help them out. In 2016, South Dakota complied by passing legislation that in essence overturned the precedent of the 1992 Quill ruling by forcing retailers whose sales exceeding a modest limit of 200 annual transactions or $100,000 in total annual sales to collect sales tax “as if the seller had a physical presence in the State.” When online retailer Wayfair objected, the matter was brought to court.

The case of South Dakota v. Wayfair was one of those decided this week as the Court’s term approached its conclusion. At stake was a pot of potential tax revenue that some estimates say could be $34 billion a year — that’s why a coalition of more than 40 states, joined by the Trump administration, called on the Court to reverse Quill.

While it was primarily a group of conservative interest groups such as the Competitive Enterprise Institute and National Taxpayers Union that objected to the tax, it was a trio of the Court’s conservative justices — Clarence Thomas, Samuel Alito and Neil Gorsuch — who joined Anthony Kennedy and leftist Ruth Bader Ginsburg in the majority. The Court decided the existing physical presence rule upheld by Quill was “an incorrect interpretation of the Commerce Clause.” Kennedy noted, “A virtual showroom can show far more inventory, in far more detail, and with greater opportunities for consumer and seller interaction than might be possible for local stores. Yet the continuous and pervasive virtual presence of retailers today is, under Quill, simply irrelevant.”

Added Kennedy, “This Court should not maintain a rule that ignores these substantial virtual connections to the State.” But Justice John Roberts, joined by the left-wing contingent of Stephen Breyer, Elena Kagan and Sonya Sotomayor, argued that it wasn’t the Court’s problem. “Any alternation to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress,” wrote Roberts in dissent. (Congress had the opportunity to address the issue way back in 2013 but couldn’t pass legislation. And they’ve tried in each new Congress since.)

Thanks to the ruling on Wayfair, the question now isn’t going to be when states will jump on the e-commerce taxation bandwagon, but how much of a toll they’ll take. Remember, the giants like Amazon and Walmart already collect sales tax on e-commerce purchases because of their widespread reach — in fact, 19 of the top 20 online retailers were already in compliance with the SCOTUS ruling. It’s the proverbial mom-and-pop shops of the Internet that this ruling will hurt. Squeezing the little guy is why the big guys support the tax.

“Imagine complying with the different rules, rates and definitions of more than 12,000 taxing jurisdictions nationwide,” writes NTU’s Mattie Duppler in the Washington Examiner. “This will create a stifling effect on the robust world of online commerce that serves to connect small businesses across the country and, indeed, across the world.”

Investor’s Business Daily notes, “The ruling means that online retailers — large and small — will soon have to comply with nearly 10,000 different tax jurisdictions across the country in the 45 states that impose sales taxes. That means different rates, varying definitions of products, and a variety of exemptions. The resulting complexity is mind-boggling.”

As our Mark Alexander presciently predicted five years ago, “Amazon and other mammoth e-commerce sellers are now positioning themselves to ‘rescue’ poor little ‘mom and pop’ online sellers by offering to process all of their transactions — in return for a substantial fee…” With this SCOTUS ruling, we’ve arrived at that moment: States will benefit by extracting more cash from the buying public, the mega-retailers will get their cut, and the rest of us will foot the bill — all in the name of “fairness.”

As Kennedy asserted, “The physical presence rule undermines that necessary confidence by giving some online retailers an arbitrary advantage over their competitors who collect state sales taxes. In the name of federalism and free markets, Quill does harm to both. The physical presence rule it defines has limited States’ ability to seek long-term prosperity and has prevented market participants from competing on an even playing field.” Is it really more important for the states to have “long-term prosperity” at the cost of wasted time and effort for compliance by small business? Sorry, President Trump, some of us consumers don’t consider this decision to jack up our taxes “a victory” like you do.

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