Taxes

The Supreme Court Eyes Online Sales Taxes

Let's hope the High Court gets it right.

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If you think internet companies aren't paying any taxes for online sales and that's killing bricks-and-mortar retailers and states' budgets, you, my friend, have been duped. Nothing could be further from the truth. The internet isn't a tax-free zone, nor is the lack of revenue the issue with state budgets. There is, however, a battle about whether state and local governments should be allowed to collect taxes from out-of-state companies.

A 1992 Supreme Court decision, Quill Corp. v. North Dakota, reaffirmed a previous decision that a business must have a significant presence in a state before that state can require it to collect sales taxes. That means a mother selling handcrafted goods on Etsy doesn't have to collect sales taxes from her consumers unless they are physically located in her state. However, Amazon collects sales taxes from customers in all 45 states that have a statewide sales tax because of its vast distribution network.

Most state lawmakers want to see Quill overturned, allowing them to force out-of-state companies to collect sales taxes on their behalf. This argument was just heard by the Supreme Court in the case of South Dakota v. Wayfair Inc. If the states were to win, they would be able to reach into the pockets of that mom selling her paintings on Etsy, even though she may live on the other side of the country, didn't elect other states' officials, and never agreed to those states' tax laws.

More tragically for consumers, tax competition among states would also be lost if Quill were overturned. Under the new regime, online consumers—no matter where they shop or what they buy—would lose the ability to shop around for a better tax system. Without the competitive pressure and the fear of losing consumers to lower-tax states, lawmakers would not feel the need to try to rein in their sales tax burden. It's that pressure, which limits their tax grabbing abilities, that these lawmakers resent and want the Supreme Court to put an end to.

Some of them probably hope that more revenue would alleviate the need to put their financial house in order. They would be wrong. According to the Kaiser Family Foundation, 33 states faced shortfalls in fiscal 2017 and/or fiscal 2018, even though revenue collection has been growing in most states. That's because the more states collect in revenue the more they spend.

Besides, states are overestimating the revenue they'd get from the taxes. Internet sales are still a small share of overall sales, and taxing them wouldn't make much difference. According to a 2017 report by the Government Accountability Office, online sales represent less than 10 percent of retail sales. Also, the 100 biggest online retailers already tax roughly 90 percent of their sales. Desperate lawmakers shouldn't expect to collect any more than 2 to 4 percent of total state and local government tax revenues this way, according to the GAO, were Quill to be reversed.

A reversal would, however, jack up compliance costs for small online retailers, which, unlike Amazon, tend to have razor-thin profit margins. Imagine suddenly having to enforce taxes for the nation's 12,000 tax-collecting jurisdictions.

Talking to NPR on the morning of the South Dakota v. Wayfair hearing, a Republican state senator from South Dakota, Deb Peters, laughed at the notion that anyone would get hurt. According to her, free software provided to online retailers by the majority of desperate states would make that cost zero. This is questionable. As an eBay representative noted on NPR in response that morning, "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." Tax software isn't that precise, and compliance would still have to be handled on a case-by-case basis. Repeat this for thousands of items and compliance is definitely not "free."

There is a lot to be lost in the Wayfair case. If Quill were to be overturned, compliance costs could skyrocket for many retailers, and good principles of taxation would be thrown out the window. Healthy tax competition is at stake. Let's hope the highest court in the land makes the right decision.

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    1. I’m making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life.

      This is what I do… http://www.jobs63.com

    2. I’m making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life.

      This is what I do… http://www.jobs63.com

  1. When I was a kid, I read about some California legislative committee trying to tax unhealthy snacks but not healthy food. This particular argument was about those peanut butter/cheese and cracker combos from vending machines. They finally settled on snacks being fully prepared, while if there was a little plastic spreading bar and separate peanut butter/cheese and crackers requiring purchaser preparation, it was food.

    My company gets a 140,000 line data file every month for taxes in the US, and I’d bet a paycheck that if you were to very strictly audit the taxes we calculate, half would be wrong in some detail or another. The district boundaries vary all over the map, the type of goods varies, there are tax holidays, some jurisdictions have amounts beyond which a separate tax rate applies.

    There are some tax-free zipcodes meant for consulate and trans-shipper use. Europe has a lot of little jurisdictions which are tax free. Look up Busingen Germeny, which is actually wholly inside Switzerland. Italy has two towns on the northern shore of a lake which straddles the Swiss border; they are tax free because theonly access is by boat or road through Switzerland.

    Nobody gets all this shit correct. The simplest solution would be to always tax by the seller’s location, but the Supreme Court scotched that. If I travel to Fargo and buy something from a store, I pay the seller’s tax; the seller doesn’t ask for my driver’s license and tax me accordingly.

    1. I used to work at a company that prepared and remitted sales tax returns for several large companies (service providers, not retailers) that had physical presence all over the country.

      In short, everything you said is true and then some.

      The way States, Counties, and Cities currently collect sales tax is with the expectation that the sellers are brick and mortar retailers with a specific physical location within a tax jurisdiction.

  2. Dia batas distrik bervariasi di seluruh peta, jenis barang bervariasi, ada hari libur pajak

  3. Perusahaan saya mendapat 140.000 file data baris setiap bulan untuk pajak di AS, dan saya berani bertaruh bahwa jika Anda sangat ketat mengaudit pajak yang kami hitung, setengahnya akan salah dalam beberapa detail atau lainnya. Batas distrik bervariasi di seluruh peta, jenis barang bervariasi, ada liburan pajak, beberapa yurisdiksi memiliki jumlah di luar yang tarif pajak terpisah berlaku.

  4. Lost in all this discussion is the fundamental injustice by which state governments conscript merchants to become tax collectors. I am an internet merchant, not a tax collector. I have no special skills or comparative advantage in collecting taxes and I did not voluntarily enter that line of business … also known as organized crime.

    1. If you aren’t prepared to correctly handle the taxes of 14,000 different jurisdictions, perhaps you don’t deserve to be running a business.

  5. Why should any state get a slice of the action every time some item changes hands?

    1. Actually of all the tax systems I think a sales tax is probably the best.

      Property tax means you can never really own property just rent it from the government. IE you are forced to participate in the broader economy to keep your property.

      Income tax they get all into your financial life.

      Sales tax you only have to worry about if you sell goods on the open market. This seems the least oppressive to me.

      1. If the government was gutted to a bare minimum for the fed and states, taxes would be super low.

        I agree that tying taxes to property is a huge mistakes because if you dont pay the government can say that they can seize your property. In reality is eminent domain which they would still have to pay you but they could seize that to pay the taxes.

        If you don’t pay taxes, they can seize your assets anyway which would include property.

        A mix of different taxes just hits the largest swath of population.

  6. One possible solution of course would be a law that requires sales tax simplification in order to tax online sales taxes. IE you would have to conform to national standards of goods definitions, and have a uniform rate for the state.

    Now you go from 12,000 to 50. That a bit easier to manage.

    1. Eliminate local options
      No special tax districts
      Single rate for ALL goods (including those that commonly also have an excise tax because they are ‘bad’ for you).
      And did not require an enumeration of gross sales by City/County
      And did not require anything more than annual filing unless you had exceeded a significant gross sales threshold
      And did not require any annual registration fees and other similar things.

      Then it would probably be doable for out of state retailers, though even then governments would likely still find a way to muck it up and make it a huge burden.

  7. A reversal would, however, jack up compliance costs for small online retailers, which, unlike Amazon, tend to have razor-thin profit margins.

    Um. Amazon has thinner than razor thin profit margins.

    1. That is what I figured too.

  8. Easy peasy: convert sales (sellers’) tax to buyers’ tax.

    That keeps the political pressure where it should be, motivated by the buyer who votes for their own city, county, and state reps. And it avoids all the complications that vendors face, knowing and satisfying the mystical 12,000 tax-sucking entities.

    Yeah, I know this is an unworkable fantasy, unless we all transact without cash and trust some third parties (credit cards? Paypal?) to tally and pay our buyer taxes. Or maybe the feds could tap their internet tracking data and send each of us a(nother) tax bill.

    Oh, never mind.

    1. “Easy peasy: convert sales (sellers’) tax to buyers’ tax.”

      Yeah, we have this already, and it’s called “use tax”.

      You DID pay your use taxes this year, right?

  9. As someone who sells online as a 3rd party seller with Amazon, the politician’s schemes are utter Bullshit. Taxes are already complicated which why I don’t charge any and let the buyer figure it out. Profits can be razor thin already because I mainly sell surplus items of value rather than sell masses of merchandise as a business.

    As is pointed out in the article, its a scam by high tax states to put their oppressive tax scheme burdens on out-of-state sellers who cannot have a say throwing those high tax bums out of office.

    Furthermore, the US Constitution prohibits taxes on exports and imports from state-to-state without Congress’ approval.
    Article, I, section 10:
    No state shall, without the consent of the Congress, lay any imposts or duties on imports or exports, except what may be absolutely necessary for executing it’s inspection laws: and the net produce of all duties and imposts, laid by any state on imports or exports, shall be for the use of the treasury of the United States; and all such laws shall be subject to the revision and control of the Congress.

    1. Yeah, the Commerce Clause has been expanded out into a truly terrible and bullshit animal, but at it’s core the original intent was a good one. It’s also why interstate borders are generally the most free.

  10. The brick and mortar guys enjoy police and fire protection, education for their kids and programs to keep the homeless population from sleeping in your doorway (unless you live in Seattle or San Francisco). It makes sense for them to pay the tax. An online retailer 3 states away enjoys no such benefits, so why should they be collecting a tax? In addition, the brick and mortar guys (or their employees) can vote these pols in and out of office. The out of state guy has no such power.

    Deputizing a company doing business 3 states away to collect your taxes is bs. If you want to start auditing and collecting use tax from your citizenry, go for it.

  11. There is no tax software on the planet AT ANY PRICE that will be able to keep track of the monthly changes to tax rates in over 10,000 jurisdictions – because it’s not just states, it’s counties and cities and even “special assessment districts” that have their own versions of what constitutes the current sales tax. And what isn’t mentioned in the article is how many of those jurisdictions want the right to retroactively audit any business anywhere that MIGHT ever have made a sale to someone there. Regardless of the ethical issue of taxation, the logistical nightmare if this decision goes the wrong way will be an incomprehensibly monumental clusterf-ck.

  12. Seeing as how the Congress has weighed-in on this issue twice in the last few decades, it would be imprudent for the Court to assume they know more than does the Nation’s elected representatives (but it wouldn’t be the first time), and it certainly could, in today’s atmosphere, generate a response from those elected members that they Court may not appreciate.
    These are, after all, Interesting Times.

  13. Lost in all the hysteria is the fact the YOU are ultimately responsible for paying the taxes that YOU owe. YOU. Not your employer, and not the store where you spend money.

    But the government knows that YOU are fundamentally dishonest, a liar, and cheat and a thief, and YOU will never send in the proper amount of taxes owed on an honor system, because YOU are fundamentally a liar, a cheat, and a thief.

    So the government forces your employer to collect the taxes that you will not willingly remit.

    If you live in New York City and decide to spend a $1,000 to buy a guitar on reverb.com, or a hunting rifle on gunbroker.com, and the seller lives in California, are you really going to send the state of California an extra $72.50 next April? C’mon man! If you are in California and you bought the item from a NYC business, are you going to remit an extra $88.75 to New York if they don’t know how to bill you for it?

    99+% of the buyers on the Internet will not willingly remit the taxes due to the various state and local jurisdictions. This make those people CRIMINALS in the eyes of the law. But how do you catch them?

    So you are not sending in the state and local sales taxes due on that Beatle’s vinyl CD you bought on eBay? Legally, that is your obligation. Congratulations, you have joined the evergrowing ranks of the underground criminal society!

  14. I’ve thought it would be far simpler to require internet vendors to collect tax on the location they do business from. It shouldn’t be any different than you walking into their store to buy something. If you’re in Cape Cod, would the shopkeeper be expected to collect NYC sales tax, or Seattle, or San Francisco sales taxes?

    Not only would it simplify tax collection, it would *also* create competition between sales-tax jurisdictions, where they’d all start competing with each other to bring in mail-order companies, and force the high-tax localities to rethink their taxes or risk losing companies.

    Which, of course, is *exactly* why it won’t happen.

    1. “I’ve thought it would be far simpler to require internet vendors to collect tax on the location they do business from. It shouldn’t be any different than you walking into their store to buy something”

      Except, of course, that I’m not walking into their store. In fact, have very likely never set foot in the state. And MY state doesn’t HAVE a sales tax.

      Never mind the situation where the order is taken in one place, processed in another, and then fulfilled from three different warehouses plus a drop shipment from the manufacturer. Why are there four different tax rates attached to my order?

      1. If this were to be the case, I’d expect online retailers to “move” their businesses to Montana, or Delaware, Alaska, New Hampshire, Oregon. Then they could be honest when saying their customers owe 0% sales tax.

  15. I know a bit about this matter.

    1) The software does work pretty well. Amazon uses it and 3P sellers can use it for a fee.

    2) Some states are smarter than others. Pennsylvania just wants its straight 8% cut from out-of-state vendors and tells you the local options are not required. SC is…amaze balls complicated and unhelpful. Filing per county, with tiny amounts. Crazy.

    3) Amazon already has stopped fighting and appears to be moving towards a model where they collect taxes for sellers. (They opposed this for a long time…) My theory is that they want to help Chinese sellers comply with the law. If they didn’t collect sales tax for them, the Chinese sellers wouldn’t do it themselves. In the Uk, they just passed a law that stopped this practice. I was mind-boggled how Chinese sellers could manage to sell products without the 20% VAT but UK sellers checked them out, and yes, they got away with it.

    4) Once Amazon has decided to collect taxes (WA state and RI demanded they do it, and Amazon complied…) they will start to support this move – as its a barrier to entry to competitors.

    1. You should see how protectionist people get when they realize the foreigners get way better deals than they do.

      Chinese sellers don’t need to comply with many regulations, and are beyond the reach of US authorities. Must be nice.

      Get caught? Oh, start a new company.

      1. Tell that to ZTE.

  16. We went through all this decades ago with mail order companies. Al that has changed is the total volume of money traveling through out of state vendors due to Al Gore’s internet.

    But I do still have a very old history book with a couple of chapters of what can happen when there is taxation without representation.

  17. There’s also the cost of submitting sales tax payments. Some States require a business to have a sales tax number. Do they expect every business selling online to obtain 30+ such numbers or equivalent?

    They’re all ignoring the damage this will do to small businesses in their own States. State A wants businesses in State B to collect and remit sales taxes for purchases made by people in State A.

    But the opposite is also true, Businesses in State A will have to collect and remit sales taxes to State B for purchases made by people in State B.

    Then there are the five states with no sales tax at all. This tax plan gets them NOTHING, it’s all downside for them.

    To the residents of any State where politicians are pitching this idea as a ‘win’ for you, it’s not. It’s going to be a burden on you and your business, same as it will be for everyone else.

    1. But State A and B will both need to hire a few hundred more tax collectors, auditors, etc. thus increasing the size of government. They’ll consume all that out-of-state revenue just collecting that revenue.

  18. It is a pity that Ms. de Rugy feels competent to discuss a tax law that she has not read.
    As a former employee of the California Board of Equalization, I was taught that the Sales Tax is _on_ the seller, who is permitted to collect reimbursement from the buyer. Various exemptions written into the Sales and Use Tax law cover sales in interstate commerce. Over the years, the law has been modified to contradict itself with regard to shipping into various tax districts in California with local taxes.
    The Use Tax on the hand _is_ on the buyer. This insanity was enacted during the Great Depression at the demand of banks and others who refused the levy of a sales tax (e.g. on checks) but did not quibble at the thought of taxes, just not on them.
    Removing the reimbursement exemption for taxes on sales in interstate commerce removes a tax subsidy, that was granted to encourage sales by making sales to out-of-state customers cheaper than in-state purchases.
    To truly level the playing field, California (and all other states with a similar exemption) merely need to cancel the exemption, thus ending the fiction that the tax is on the buyer.

  19. Amazon wants this, it will shut the little guy down. The small time Internet seller doesn’t have the resources to collect sales taxes from all fifty states. Amazon does, so Amazon wins, you lose.

  20. Here’s an extreme sales-tax issue I outlined elsewhere.

    Assume California passed a $10/gallon gas sales/use tax. Obviously Californians near a border with another state will quickly start crossing the border to get their gas, thereby avoiding this tax.

    California starts gently reminding its residents to report and pay the use tax on the gas that they “imported” in their vehicles and 5-gallon cans. But they just don’t do it.

    California could resort to stringent audits with stiff penalties. But that would rile folks up even more and they’re already mad about this $10/gallon gas tax.

    California could set up border inspections…you must stop and have your gasoline levels checked before you leave the state and stop and pay taxes on any excess you have in your tank upon your return (even California realizes it’s futile to try to tax you on gas that you used outside the state). That’ll go over well…

    Or, California could try to force gas stations over the border to check licenses of their customers so that they can charge Californians the tax and remit it to California. Where does California think it finds the authority to do this? There is none.

    1. This is basically the situation today with online/catalog sales. People just don’t pay the use taxes they legally(*) owe. States don’t want to go down the audit and penalty route, nor do they want to do border controls to inspect for incoming untaxed merchandise. So they want to force out-of-state businesses to do the dirty work for them.

      (*) Right or wrong, at least a sales/use tax is levied on state residents.

  21. Brick-and-mortar Main Street vendors in Delaware have no obligation to collect and remit Maryland use taxes for Marylanders frequenting their stores. Even if the Marylanders are jumping across the state line to take advantage of Delaware’s 0% sales tax. Even if the Marylanders then fail to report and pay their state’s use taxes.

    Internet vendors should continue to have the same right to not be forced into acting as a tax collector proxy for some state in which they do not have a physical point-of-presence.

    While I suppose tax-and-spend supporters would like it, I think many people and Main Street vendors would be offended at the notion that a state like, let’s say New York, could force a brick-and-mortar store in, say, Orlando, FL to quiz customers so as to ferret out the New Yorkers and collect the NY sales tax on any items purchased that might be possibly taken home to New York (and then subject to NY use taxes). But it would put the Orlando brick-and-mortar store selling to a New Yorker in the store in sync with what they want an Orlando online vendor to do for New York customers.

  22. Internet vendors are NOT “not paying taxes”

    Bear in mind that what are being discussed are sales taxes, which are paid by customers.

    Businesses merely collect and remit these taxes. They are forced to act as proxy tax collectors because it is more efficient for states for force a few thousands of businesses to account for their sales than it is to force a few million citizens to do so individually (which is already a proven utter failure as per use taxes). And states want to force vendors located outside their state to fall under the same laws.

    Please bear that in mind before going of on a “these online corporations are skipping out on taxes they owe! mom brick-and-mortars are carrying their load!” chain of thought.

    If this changes, brick stores would operate under one set of state sales laws, plus the federal laws. Internet stores would be subject to 50 sets of state sales laws at the same time, plus federal laws. That’s NOT a “level playing field”.

  23. I’m with jelabarre – Make the states compete.

    States that are concerned about the omission of online sales tax can pass new legislation either specifically for their ‘state’ online retailers or just apply it to income tax. In no way should this become a federal matter.

    The ONLY reason this is even an issue is because sales tax is ADDED to the retail price-tag AFTER the sale. Unlike state income/business tax which is hidden INTO the price-tag. So really, what’s the difference?

    The workers and most of the administration of said state company and/or function of a company VOTE in that state. The manufacturing, packaging, billing and all other items are operated in that state and supposedly used some state resources – thus if a tax must be collected it should be taxed on the entity within THAT STATE instead of some other state.

  24. The part of the issue that most commenters here do not understand is that many of these tax jurisdictions require a PERMIT to collect the sales tax as a merchant, and require quarterly reports to go with that. Some even charge a fee for the permit. California is an example of this. I spent months trying to get a California Sales Tax Permit from the Board of Equalization and finally had to go in person in order to get them to issue it. The problem: I did not have an address in the state of California!” and they refused to mail the forms out of state. Now imagine doing that for forty-four states, and trying to keep track of the paperwork. Keep in mind, most sales taxes are based at the County and even Municipal level, so there are hundred of variations. My fear is that this mess is going to be settled by instituting a Federal Sales Tax that can be used to pay all these little tax fiefdoms. The best solution would be to eliminate ALL sales tax.

  25. This insane tax grab needs to be crushed and buried. Some states, amongst them Washinton, have no coerced middlers like Amazon to collect sales tax pno every sale shipped into that state, no matter its origin. I’ve checked into it, and i see no way a small business can properly and accurately report these sales on their business and sales tax reports, and the accounting to figure out what got sold where and through which channels will be an intolerable nightmare.

    The Constitution prohibits any taxes, imposts, levies, duties, be imposed on goods moving between states. I suppose our best hope is that Justice Gorsuch will see this aright, and make a strong case that sways others to vote against levying the taxes.
    I see in my own state a small fraction of MY tax dollars wasted in so many ways, and want to scream. If any businessman conducted his own enterprise thusly he’d not be in business very long. But with the government, We the Sheeple are the bottomless pit of revenue for them to waste.

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