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Supreme Court rules internet businesses must collect sales taxes

By David G. Savage • Jun 21, 2018 at 4:25 PM

Attention shoppers: If you've been avoiding sales taxes online by shopping with retailers who don't have a physical presence in your state, that will be changing soon.

The U.S. Supreme Court on Thursday ruled in favor of states being able to force retailers to collect sales taxes no matter where the seller operates its business. The case dates back 26 years and was used as a price advantage by internet retailers.

It's a big change for the retail industry and for state budgets. 

With its ruling, the Supreme Court standardized taxing rules for traditional retailers and online transactions, ruling that states and localities may collect sales taxes on all purchases over the internet. By a 5-4 vote, the justices that ruled that online sellers can be required to collect state and local taxes from customers even if the internet vendors have no physical presence such as a store or factory in that state.

The ruling will mean higher prices for many online shoppers and billions of dollars in extra revenue for the states. It may also pose a headache for small-scale web merchants who will have to keep track of and remit sales taxes for thousands of jurisdictions.

But tax experts say better software has made it easy to quickly calculate the exact rates for each locale, and many states have devised a “streamlined” filing system, in which a single state office collects and dispenses taxes for its counties and cities.

In 1992, during the era of mail-order catalogs, the Supreme Court ruled it was unconstitutional for states to demand that out-of-state sellers collect and remit sales taxes on all purchases. The court said then, in Quill vs. North Dakota, that states could not extend their taxing authority to companies that had no stores, warehouses or “physical presence” within the state.

But with the explosion in online shopping, lawyers for 42 other states urged the high court to revisit the question and to overturn the Quill decision.

While Amazon and other large online retailers regularly collect sales taxes on purchases, many others have refused to do so. They argued it is an unfair and heavy burden to require them to collect varying taxes charged by more than 10,000 jurisdictions across the country.

However, traditional stores and shop owners said it was unfair that they had to collect sales taxes on each purchase, while their customers had the option to buy the same product online and avoid paying the tax.

Last year, the Government Accounting Office estimated that state and local governments were collecting 75 percent to 80 percent of the taxes they are owed from “remote sellers,” but they were nonetheless losing between $8 billion and $13.4 billion a year in uncollected taxes for online sales. State officials put their revenue losses even higher.

In the biennial budget passed in 2017, Ohio lawmakers established a means for the Ohio Department of Taxation (ODT) to collect sales tax from online vendors whose sales in Ohio exceeded certain thresholds, however the ODT has yet to implement the system which has many similarities to the South Dakota law.

Ohio is also one of 24 states that is a member of the Streamlined Sales Tax Governing Board (SSTGB), an organization striving to establish a uniform process for states to collect sales tax from remote online sellers. Through the agreement as a member of the SSTGB, Ohio would not begin collecting sales tax retroactively based on this decision.

State Representative Gary Scherer (R-Circleville), the vice chair of the House Ways and Means Committee and member of the Executive Committee for the SSTGB, has worked on this issue throughout his tenure in the legislature.

“This decision is a win for both Ohio-based businesses as well as Ohio consumers,” Scherer said. “Ohio businesses can now be put on a level playing field with major online retailers, who up until now, have been able to skirt their responsibility to collect and remit sales tax to the state of Ohio.

“This ultimately left the burden of remitting sales tax for online purchases to Ohioans who are expected to declare online purchases on their annual income tax return for the sales tax to be calculated. Because consumers were already expected to be paying this tax, today’s decision in no way results in a new tax or a tax increase, but rather gives Ohioans the ability to more easily comply with the law,” Scherer continued.

“Given the Wayfair decision, I believe it is crucial for Congress to now pass the Remote Transaction Parity Act, which would create a streamlined and uniform process nationwide for online retailers. We must have a harmonious system for businesses, consumers and states to easily comply with the new standard established by today’s decision. Congress has the ability to create a consistent collection system by passing the RTPA,” Scherer concluded.

Kevin Lyons, spokesman for Texas Comptroller Glenn Hegar, said, "We welcome the court's ruling in this case and are currently assessing any potential revenue impacts as a result of this decision as well as whether any rule changes or legislation might be required to achieve the benefits of the decision."

Other states will be doing the same thing and software and tax collection services will be gearing up.

"This is a victory for common sense and the economic realities of this century," said Jerry Storch, former vice chairman of Target and former CEO of Toys R Us. The 1992 decision predates e-commerce and once the internet came of age it accelerated the demise of mom and pop retailers on Main Street, he said on CNBC.

Local merchants and large chains complained over the years that shoppers used their stores as showrooms and would then go online to make the purchase tax-free.

The decision ends years of work by the retail industry "to reverse a pre-internet era rule that distorts free markets and puts local brick and mortar stores at a competitive disadvantage with their online-only counterparts," said Deborah White, general counsel for the Retail Industry Leaders Association. "This was the right case and the right time for the Court to act, and we couldn't be more pleased with the outcome."

The retail industry had been trying to get Congress to address the issue for years, but proposed legislation would never progress. Some believed it was a new tax even though state laws already require individuals to remit taxes on their purchases if it wasn't collected, but that's been impossible to enforce.

Amazon has been collecting sales taxes in all states that have the tax since April 2017 and in many states -- including Texas -- much earlier. But half of Amazon's sales are from third-party Marketplace sellers, who for the most part don't collect sales taxes. Some Marketplace sellers have contracted with Amazon to collect sales taxes for them. Major online retailers such as Wayfair, Overstock, eBay, Shopify and Etsy, opposed the law change.

Still, Amazon used the law for many years to avoid collecting sales taxes initially on its book sales and then other merchandise. As it started building fulfillment centers, at first it went to states with either no sales taxes or low populations where it didn't do a lot of business anyway.

Amazon tested that law in Texas trying to say a subsidiary was running a distribution center in Irving, but was challenged by the state of Texas when The Dallas Morning News reported the existence of the Irving facility. After a four-year stalemate with the Texas Comptroller Susan Combs, Amazon agreed in 2012 to start collecting sales taxes from its customers in Texas. Since then, Amazon has opened 10 fulfillment Centers in Texas.

"Rejecting the physical presence rule is necessary to ensure that artificial competitive advantages are not created by this Court's precedents," the Supreme Court decision said. "This Court should not prevent States from collecting lawful taxes through a physical presence rule that can be satisfied only if there is an employee or a building in the State."

The court was particularly strong in its language using home furnishings retailer Wayfair, a defendant in the case.

"Wayfair offers to sell a vast selection of furnishings. Its advertising seeks to create an image of beautiful, peaceful homes, but it also says that "'[o]ne of the best things about buying through Wayfair is that we do not have to charge sales tax.'"

"What Wayfair ignores in its subtle offer to assist in tax evasion is that creating a dream home assumes solvent state and local governments. State taxes fund the police and fire departments that protect the homes containing their customers' furniture and ensure goods are safely delivered; maintain the public roads and municipal services that allow communication with and access to customers..."

Thursday's opinion was written by Justice Anthony Kennedy and Justice Clarence Thomas reversed himself from when the case first came before it 26 years ago. Chief Justice Roberts with Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan dissented.

EDITOR’S NOTE: Maria Halkias of The Dallas Morning News (TNS) contributed to this story.


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