How the states collect states taxes from online retailers could well be determined by the U.S. Supreme Court as it heard arguments Tuesday, April 17. South Dakota, appealing a lower court decision that favored Wayfair, Overstock.com, and Newegg, is being supported by President Donald Trump’s administration. The present ruling stipulates that state taxes cannot be imposed upon a purchase unless a retailer has a physical presence in the state. A new ruling could potentially help small brick-and-mortar retailers who are presently at a competitive disadvantage with online merchants while hurting small eretailers. The states are looking to collect up to $18 billion, according to a 2017 federal report. The case is due to be decided by the end of June.
What the Internet Tax Freedom Act Means to Consumers
In 1998 Congress enacted and President Clinton signed into law, The Internet Tax Freedom Act (ITFA; P.L. 105-277), implementing a three-year moratorium preventing state and local governments from taxing Internet access or imposing multiple or discriminatory taxes on electronic commerce. At the time, online retailing was barely a twinkle in an entrepreneur’s eyes. It basically didn’t exist and the moratorium was meant to give it a fighting chance to come to life. As it stands, state and local governments cannot impose their sales tax on the monthly payments that consumers make to their Internet service provider in exchange for access to the Internet. In addition to the moratorium, a grandfather clause was included in ITFA that allowed states which had already imposed and collected a tax on Internet access before October 1, 1998, to continue implementing those taxes. But all of this could come to an end.
The Justices are looking at South Dakota v. Wayfair, Inc. a legal precedent that prevents states from imposing sales taxes on companies that don’t have an in-state presence, like a warehouse or employees. The court last affirmed the “physical presence” rule in a 1992 case, Quill Corp. v. North Dakota.
What is at Stake?
Why should you care? Because if the Supreme Court overturns the Quill case, it may create a new revenue source for local and state government and an added tax burden on the consumers.
For an insightful brief on the law, read The Internet Tax Freedom Act: In Brief written by Jeffrey M. Stupak in 2016.
The Brief states, The original three-year moratorium had been extended eight times before being converted to a permanent statute. As the original moratorium was extended, changes were made to the definition of Internet access to include and exclude different services and technology. Notable changes include the inclusion of digital subscriber lines under the moratorium and the exclusion of Voice over Internet Protocol services from the moratorium.
An e-marketer report states that “Retail ecommerce sales in North America will rise 15.6% this year to reach $423.34 billion, maintaining the area’s status as the world’s second-largest regional ecommerce market. The region will see consistent double-digit growth through 2020, fueled by increased spending from existing digital buyers, expansion into new categories such as grocery, and growing mcommerce sales.”
A GAO report estimated that state and local governments could gain from about $8 billion to about $13 billion in 2017 if states were given authority to require sales tax collection from all remote sellers. This is about 2 to 4 percent of total 2016 state and local government general sales and gross receipts tax revenues. The Santa Cruz Chamber of Commerce stated in a blog post that the estimate is unlikely to hold true “when considering that multiple grandfathered states eliminated their Internet access taxes voluntarily, and California even implemented a similar state-level moratorium on Internet taxes in 1999. Estimating the lost revenue from the Internet tax moratorium is difficult because it is necessary to speculate how states would have acted in the absence of the moratorium. The seven states that currently collect sales tax on Internet access raise an estimated $563 million per year.”
If Law is Overturned, Amazon Could Benefit
While the nine justices must remain immune to the President’s opinion, the case was heard at a time when the president expressed harsh criticism of Amazon.com and against its CEO, Amazon CEO Jeff Bezos. It is worth noting that Bezos owns the Washington Post, a newspaper that Trump has often qualified as peddling “fake news”.
Ironically, Amazon “would be the big winners” if the law is overturned because smaller business would be forced to pay larger companies, like Amazon, to use their software to collect sales taxes for them, said Norquist, president and founder of Americans for Tax Reform.
South Dakota’s case is supported by industry and trade groups representing major retailers with brick-and-mortar stores and interests,.The National Retail Federation, which supports the state, has a membership that includes major corporations such as Walmart Inc and Target Corp, as well as Amazon.
“This case is largely about whether collecting sales tax is an undue burden on interstate commerce,” NRF President and CEO Matthew Shay said. “That might have been the case in 1992 but technology has eliminated that concern just as it has transformed the retail business and so much of the rest of our world. Today, there’s an app for that. Representing retailers both large and small, NRF has been working with policymakers to rectify this disparity for nearly two decades,” Shay said. “We are very hopeful that the reason the justices have agreed to hear this case is that they want to update a ruling that has become antiquated in the light of developments over the past quarter-century. It’s time for the Supreme Court to clear the way for modern sales tax policy that will finally put all channels of retail – from stores to online – on a level playing field where everyone competes under the same rules. Online sellers who don’t have to collect sales tax have held an unfair price advantage over local retailers for far too long.”
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