The U.S. Supreme Court last month redrew the rules governing when online retailers must pay state sales taxes, prompting some business groups to urge Congress to step in and simplify the maze of complex sales tax regimes in place nationwide.
In South Dakota v. Wayfair, the high court overturned a 1992 case that it said leads to unfair tax breaks for online retailers. In its 5-4 decision, the court struck down the concept that online retailers operating in many states needed to collect state sales taxes only when the retailer had a physical presence in the state.
“The recent Supreme Court decision in South Dakota v. Wayfair requiring online retailers to collect sales tax presents a myriad of new challenges for self-employed entrepreneurs,” Keith Hall, president of the National Association for the Self-Employed, said in statement. “… Millions of self-employed businesses offering their goods and services for sale online could now have to navigate a nightmarish web of compliance challenges.”
But others see the court ruling as simply leveling the playing field in interstate commerce. For decades, they say, out-of-state online retailers have had tax advantages over brick-and-mortar stores, which have no choice but to pay a state’s sales tax.
The National Conference of State Legislatures (NCSL) called the decision a victory for traditional retailers.
“Brick-and-mortar stores will no longer be penalized for collecting the tax revenues that fund our schools, infrastructure and the vital public services that the state and local governments provide,” NCSL President Deb Peters said. “Good tax administration is good public policy, and state officials look forward to working with all stakeholders in the coming months as we move forward to level the playing field for all of our nation’s retailers.”
The NCSL also does not see Congress stepping in to standardize how state tax regimes operate so that online retailers are not overly burdened by the complexities of the different state tax rules.
“I do not see the appetite on Capitol Hill to pass any sales tax legislation, let alone in an election year,” NCSL spokesman Mick Bullock told Watchdog.org in an email. “After all, Congress failed to act for 26 years – why would they now?”
Groups representing small businesses, however, say smaller online retailers will be hurt most by the Wayfair decision. The South Dakota sales tax system, which the high court upheld in its ruling last month, applies to out-of-state retailers that deliver goods or services worth more than $100,000 into South Dakota. Online out-of-state sellers are also subject to the state sales tax if they complete 200 or more sales deliveries.
“I suspect that new (federal) legislation will be forthcoming because something has to be addressed,” Molly Brogan Day, spokeswoman for the National Small Business Association (NSBA), told Watchdog.org.
Online retailers that do business in multiple states will now have to determine if the goods they sell are covered by different state’s sales taxes and to forward the tax funds to the appropriate state agency, Brogan Day said. In addition, there are city and regional tax regimes in place that will add to the complexities and administrative costs for these retail businesses with slim profit margins, she said.
The NSBA liked many aspects of market fairness legislation that Congress considered in 2013 but didn’t pass, according to Brogan Day.
“Essentially, what it did was to set up mechanisms to make it easier for businesses to file taxes, especially if you are a catalog or online retailer and you’re selling things in 34 states,” she said.
Association members have reported increasing tax challenges in recent years, and the Wayfair decision will no doubt add to that, Brogan Day said. The court ruling may also result in some online retailers making decisions to not sell in certain states, she said.
“Consumers could be hurt by this in seeing fewer and fewer options online to purchase things, Brogan Day said.
The Tax Foundation in Washington, D.C., was among the parties filing briefs in the Wayfair case. Its brief, however, supported neither side but urged the Supreme Court to uphold the legality of the South Dakota law while constraining states from adding further burdens on businesses.
Joseph Bishop-Henchman, executive vice president of the foundation, said the language of the South Dakota law will exempt small-scale online sellers from collecting sales taxes.
“As for the retiree selling crafts on Etsy, not a lot of them will hit that threshold,” Bishop-Henchman told Watchdog.org.
If other states begin duplicating South Dakota’s framework, the effect would be to simplify operations for online retailers, he said. And this could result in some good sales tax reforms throughout the nation, according to Bishop-Henchman.
“This is also the kind of thing a congressional action can set a minimum standard on,” he said.
But Congress is not likely to act right away to ensure online retailers don’t face a maze of sales tax burdens, Bishop-Henchman said, given the failure of such efforts in past years.
The Supreme Court’s ruling on the online sales issue was not surprising, he said.
“I think they reached the right decision for the right reasons,” Bishop-Henchman said of last month’s decision.
And consumers will adapt to the ruling with the attitude that “It was nice while it lasted, but now we have to pay taxes on our online purchases,” he said.