Small retailers are not collecting state taxes from online shoppers unless the store has a physical presence in the state where the buyer lives. That could change soon.
Based on a prevailing Supreme Court law, retailers can be forced to collect taxes only in states where the company has physical presence.
This law was challenged by the state of South Dakota as it seeks to collect sales taxes from out-of-state internet retailers.
On April 17, Tuesday, the U.S. Supreme Court will conduct oral arguments, and will decide whether it will retain or overturn a 26-year-old ruling related to catalog retailers. The court will also rule whether states have the authority to tax all online purchases.
Whatever ruling that the Supreme Court will issue would likely affect the national e-commerce and online shopping industry.
Hello, Sales Tax?
In 1992, during the era of mail-order catalog shopping, the Supreme Court ruled that retailers can only be required to collect taxes in states where the company has an actual store or physical presence.
The said ruling was imposed in response to the case of North Dakota vs. Quill, an online office supply firm.
However, in 2016, South Dakota passed a law requiring retailers with at least 200 transactions or $100,000 in sales per year in the state to collect state taxes. Even retail companies without a physical store in South Dakota were required to follow the state law.
South Dakota sued top online retailers Wayfair, Overstock, and Newegg, for failing to comply to the said state tax law.
In the said case, South Dakota state attorneys asked the High Court to review if retailers can be required to collect state taxes in states where they lack physical presence.
In 2017, an audit of the Federal Government Accountability Office indicated that states missed the opportunity to collect some $13.7 billion due to the Supreme Court law on state tax for online purchases.
Effects On E-commerce And Online Shopping
Retailers that have brick-and-mortar stores and are already collecting taxes are backing South Dakota.
"Things have changed a lot since 1992. The entire nature of interstate commerce has changed," says Stephanie Martz, general counsel of the National Retail Federation, which has members such as Walmart Inc., Target Corp., and Amazon.
Online retailers said reversing the 1992 precedent is a negative move in terms of e-commerce.
"[It] provides the many small businesses that use the internet with a very clear and simple and stable legal environment in which to grow their business," according to Brian Bieron, eBay's senior director of government relations.