The battle over online sales tax is now front and center before the nation’s highest court.
The United States Supreme Court heard arguments last month in the case of South Dakota v. Wayfair in which the court will decide whether to overturn a 1992 decision based on catalog retailers.
The giants of online retail already collect sales tax in states where they have a physical presence.
Many smaller retailers don’t collect sales tax unless they have a physical presence in states where buyers are located.
A reversal by the Supreme Court could mean that all online retailers must collect sales tax everywhere.
“There’s so many potential problems with this,” said David Gordon, president and CEO of Gordon Companies in Cheektowaga.
Gordon is an online retail seller who operates ChristmasCentral.com.
“Our business used to be 95-percent retail, 5-percent internet, and then it changed. Now it’s 5-percent retail, 95-percent internet. That extreme,” said Gordon, whose online store ships all over the world.
Gordon worries about the bottom-line if he’s forced to collect sales tax in states other than New York, where he’s based.
“If we have less sales, less employees,” he said. Here’s the issue: Should online merchants collect sales taxes in states where they have no physical presence?
The petitioner in the case is seeking to overturn the Quill decision of 1992 which holds that states cannot force sale tax collection by vendors who do not have personnel or property in the state.
“I don’t think that this really will change an individual’s decision whether or not to shop online,” said Nicole Kaeding, director of special projects with the Tax Foundation in Washington, D.C.
“There’s more than 10,000 different sales tax jurisdictions across the country, meaning, there’s more than 10,000 different tax rates and tax bases. And this is a bit difficult for any retailer,” said Kaeding.
According to the U.S. Government Accountability Office, it’s estimated that a ruling in favor of South Dakota could pump up to $13 billion a year of new tax revenue into the coffers of state governments.
“Obviously, really large states that have a lot of population like New York, California, I mean, we’re talking about some pretty big numbers here that are in play,” said Steve Elwell, vice president of Level Financial Advisors in Amherst.
He thinks there’s an argument to be made that times have changed when it comes e-commerce.
“As the online experience of shopping gets bigger and bigger there’s enough money at play where state legislators and Congress even may step in and say, okay, wait a minute. The economy in the world has changed. Do we need to change any of our laws and taxes to reflect that?” Elwell added.
The bigger e-commerce companies already collect and remit sales taxes because they have a presence in all 50 states.
South Dakota argues that by selling tax free, many online retailers are getting an unfair advantage over big box stores and smaller brick-and-mortar Main Street shops.
“It’s about the fact that that small business on Main Street is losing its sale. That’s not fair. That’s not right. And that should not be constitutionally sanctioned,” said South Dakota Attorney General Marty Jackley.
Those fighting the change say that it would impose an undue burden on small retailers who would owe not just state sales taxes but local sales taxes that many states and counties also impose.
Carl Szabo, vice president of Net Choice, an e-commerce trade association, says it cuts both ways.
For example, he says a smaller Main Street business that decides to go online and sell would be forced to comply immediately with thousands of tax jurisdictions.
“We’re trying to make sure that states can’t reach across their borders, and tax collectors in Boston can’t impose burdens on Buffalo businesses,” said Szabo.
David Gordon, whose online retail operations already collect sales tax from buyers in New York because that’s where his operation is based, says he’s already receiving threatening letters from other states.
“Several states are playing that game, and if you don’t we’re going to do this to you. We’re going to sue you. The attorney general’s going to call you,” said Gordon.
“I feel they have no jurisdiction. They’re not just doing this to me. They’re doing this to everybody,” he added.
The question remains:
Will the Supreme Court reverse course, and argue that online commerce is so pervasive now the “physical presence” requirement no longer makes sense?
“I think what might happen though is the court might give us a bright-line rule just saying, any online commerce is subject to state sales tax; that would be an easily appreciable standard to follow. Basically, any of the 50 states can charge sales tax,” said Mark Bartholomew, who teaches law at the University at Buffalo.
For now, it’s anyone’s guess how the nation’s highest court will rule, and what it’ll mean for online sellers like David Gordon.
“I believe in a fair playing field, but I think this has really, really got to be thought out, and hopefully they don’t make a snap decision on this,” said Gordon.
A ruling in the case is due by the end of June.