Get ready for more sales taxes on online purchases

Saul Franklin
June 22, 2018

A bipartisan group of senators filed a brief in the case supporting South Dakota's effort to overturn the online sales tax ban, essentially acknowledging that the legislative body was too dysfunctional to fix the problem.

Before this ruling, online retailers had to have a physical presence in a state to be subjected to that state's sales tax.

The U.S. Supreme Court's new ruling that declares states can make retailers collect sales taxes on online purchases could potentially boost Washington state's bottom line by hundreds of millions of dollars.

But many online sellers, such as Etsy or EBay, that serve as a third party portal for thousands of small homegrown businesses that do not pay sales taxes, point to confusing tax rules that could expose them to costly audits for any revenue shortfall. Accordingly, the National Retail Federation, which substantially represents traditional retailers, celebrated the decision and called on Congress to pass uniform sales tax rules for omnichannel merchants. Writing for the majority, Justice Anthony Kennedy wrote that the old rule is increasingly "removed from economic reality and results in significant revenue losses to the States".

Brick-and-mortar retailers are also celebrating the news. Avalara helps companies around the world comply with sales tax laws using automation software. He argued that the rule "limited States' ability to seek long-term prosperity and has prevented market participants from competing on an even playing field".

"Attempts to apply the physical presence rule to online retail sales are proving unworkable".

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"With the appropriate action by the Legislature and Florida Department of Revenue, not only will the state be able to collect the sales and use tax that has always been legally due, but Floridians will no longer be unknowingly breaking the law".

Not having to pay state sales tax also gave many internet retailers an edge on their brick-and-mortar counterparts, as sales tax contributes to the overall purchase price of a good. "SC already collects (sales tax) on 22 of the top 25 e-retailers". All but five states impose sales taxes.

A 2011 report issued by the Indiana Fiscal Policy Institute found the state is likely losing about $77 million in sales taxes on these e-commerce transactions each year.

Chief Justice John G. Roberts Jr. dissented in an opinion joined by Justices Stephen G. Breyer, Sonia Sotomayor and Elena Kagan. "Big victory for fairness and for our country". While the Supreme Court spoke approvingly of the law, it sent it back to South Dakota's highest court to be revisited in light of the court's decision. However, Alaska and Montana allow individual individual cities to collect local sales taxes, according to the Tax Foundation.

But the practical effect in MA may be more about providing clarity than gaining any substantial new revenue, since MA already started collecting taxes from online sales a year ago - despite a lawsuit challenging those collections.

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