By Ringside Talent
June 27, 2018
You’ll soon be paying more in taxes for online purchases.
The US Supreme Court on Thursday gave states the ability to require online and out-of-state retailers to collect and send them state sales taxes. The 5-4 decision overturns a 1992 Supreme Court ruling that prevented the practice.
Brick-and-mortar retailers in states are required to collect taxes on a state’s behalf. Until now, that requirement didn’t apply to online retailers with no physical presence, such as an office or warehouse, in a given state. Instead, consumers were responsible for sending states the necessary taxes — something that most people never do. That’s resulted in states losing millions of dollars in sales taxes every year, and a decades-long tax advantage for online retailers over their brick-and-mortar peers. Those issues have only been exacerbated over the years as more consumers spend money online, resulting in a long list of bankruptcies and store closures at traditional retailers.
The decision weighed on shares of major internet retailers, including Amazon, eBay and Wayfair, all dropped following the decision. Shares of online crafts market Etsy also fell.
Thursday’s decision reflects the court’s awareness of changes in consumer behaviors, which have allowed many to skip local taxes by shopping online. Still, e-commerce remains a relatively young industry. It’s hard to say whether the new decision will weaken its continued growth and harm smaller online businesses.
Justice Anthony Kennedy referenced the industry’s swift rise in the majority opinion, noting that mail-order US sales in 1992 were $180 billion, less than half of e-commerce sales today. “Last year, e-commerce retail sales alone were estimated at $453.5 billion,” he wrote. “Combined with traditional remote sellers, the total exceeds half a trillion dollars.”
Moody’s analyst Charlie O’Shea said Amazon’s direct sales won’t be affected by the new decision, since the world’s largest online retailer already collects sales tax in every state that has one. However, he added, smaller retailers that sell their goods through Amazon could face a significant impact, since a chunk of their sales haven’t been taxed. Whether higher taxes on those goods will hurt Amazon’s overall revenue “remains to be seen,” O’Shea said, though he noted that Amazon has thrived as a business despite needing to collect more in sales tax as it expanded to new states. Amazon didn’t immediately respond to a request for comment.
eBay CEO Devin Wenig tweeted Thursday that the decision was clearly aimed a larger businesses and called on Congress to create exceptions for small businesses, like the many that use his company’s site.
In 2016, South Dakota enacted a law requiring out-of-state sellers to collect and send sales taxes, after years of grumbling from traditional retailers. The law was limited to companies delivering more than $100,000 of goods or services to the state, or completing 200 or more transactions. That minimum was likely meant to avoid an undue burden on small mom-and-pop retailers who sell their goods on eBay, Amazon or other online marketplaces. South Dakota then filed a lawsuit against three large online retailers — Wayfair, Newegg and Overstock.com — to declare the new law valid. The suit eventually found its way to the Supreme Court. The state argued it was losing between $48 million and $58 million a year due to the tax situation.