SCOTUS Decision Signals Death of Sales Tax-Free Internet Purchases

Reaction from retailers and customers is mixed, as the stocks of Wayfair, Amazon, eBay took a dive after the announcement

Internet merchants can be required to collect sales taxes from purchasers whether or not the seller has a physical presence in a state, according to the nation’s highest tribunal.

Thursday’s 5-4 decision by the Supreme Court overturned a 1992 Quill Corp. v. North Dakota ruling, which essentially allowed internet businesses lacking a substantial physical connection to a customer’s state of residence (e.g., a brick-and-mortar presence) to skate on sales taxes imposed by the jurisdiction.

Some organizations, such as the National Taxpayers Union Foundation (NTUF), mourned the decision, saying it “invites chaos.” Others, such as the National Retail Federation, hailed it as a “major victory,” with the caveat that Congress must lay out hard-and-fast federal regulations rather than leave individual states to their own devices to interpret and apply as they see fit, the Associated Press reported.

Meanwhile, small-business owners of brick-and-mortar establishments are welcoming the decision with open arms, saying it’s been a long time in coming.

“I think that’s great,” Andy Cohen, owner of Barkley’s Gourmet Marketplace, a small pet supply shop in Flemington, New Jersey, told LifeZette.

“I wholeheartedly support that as a brick-and-mortar retailer because it levels the playing field,” he said, referring to the requirement now that all online businesses selling in a state can collect sales taxes the same way he does in his small shop.

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Online competition in a business like Cohen’s is fierce. He has felt the impact of it firsthand, and its intensity has ramped up over recent years.

“It makes us 7 percent less competitive on price,” he said flatly. “We do not try to compete on price. We offer service, we offer the ability to touch, see, smell, and feel things, and that has value. But for some customers, where price is the primary motivation, it adds a 7 percent burden to selling them something.”

Margins are “thin enough that 7 points makes a big difference,” he added. “For me, [this decision] removes one, what I believe is an unfair piece of competition.”

His take is that the government has, in the past, essentially subsidized online retailers by not requiring them to collect sales tax.

Cohen’s hope is that the decision by the high court this morning may at last begin easing what has become an increasingly burdensome situation for brick-and-mortar retailers.

He also pointed out that states — cash-strapped New Jersey, in his case — had been losing “massive amounts of tax revenue” under the current arrangement.

As the owner of a brick-and-mortar store, Cohen noted that he either directly or indirectly contributes to state and municipal coffers via property taxes, school taxes, and special municipal taxes. His online competitors, though they are selling to the same customers he does, are not required to do likewise.

“I support the decision. It helps level the playing field. And I hope state legislatures will be smart about this in the way they implement it.”

However — as enthusiastic as Cohen’s response was, other groups are equally passionate in their opposition. Opponents such as the NTUF characterize the decision as “a significant blow to taxpayers and internet entrepreneurs.”

The organization filed an amicus brief in the case that urged the court to uphold the requirement that in order to require a business to collect sales tax in a state, it must have a physical presence in that state.

Andrew Moylan, executive vice president of the NTUF, said in a statement on the decision that “the Supreme Court has created a massive new problem that will endanger the livelihoods of internet entrepreneurs across the country and hurt consumers in every state. Congress must act quickly to protect the thriving internet economy that was built over the previous decades of common-sense commerce policy.”

The sale taxes were due, but it was technically on the consumer to pay them.

In delivering the opinion of the court, Justice Anthony Kennedy explained the conundrum in which states have found themselves as internet sales expanded exponentially in recent years.

Businesses without a presence in South Dakota, for example, weren’t required to collect and remit sales taxes to the state. The sale taxes were due, but it was technically on the consumer to pay them.

Kennedy noted that “consumer compliance rates are notoriously low.” Few individuals regularly calculated the sales taxes due on their internet purchases and then paid them at the end of the year. Few South Dakotans even knew they were obligated to do so. Hence, South Dakota was unable to collect the revenue.

The decision enables states to require large internet retailers such as Wayfair, Overstock.com and Newegg to collect and remit sales taxes just as small-business owners like Cohen have been doing for years.


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Michele Blood is a Flemington, New Jersey-based freelance writer and a regular contributor to LifeZette.

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