The party is over for online retailers who have enjoyed the advantage of selling goods tax-free.
In a 5-4 ruling, the U.S. Supreme Court overturned a 1992 precedent that barred states from collecting sales taxes from online businesses that had no substantial connection to the state.
Justice Anthony M. Kennedy wrote for the majority in saying that the 1992 precedent had “distorted” the nation’s economy, putting brick-and-mortar businesses at a disadvantage. It also cost states between $8 billion and $33 billion in annual taxes.
Carl Davis, research director at the Institute on Taxation and Economic Policy, a Washington think tank, was quoted in The New York Times saying, “State and local governments have really been dealing with the nightmare scenario for several years now.” He added that “this is going to allow state and local governments to improve their tax enforcement and to put local businesses on a more level playing field.”
The potential benefit to states, a federal report estimates: $33 billion a year in new tax revenue. We have some doubts about giving state governments that much more to spend, but the benefits to local retailers outweigh the dangers.
It is up to states to ensure the changes don’t hurt the smallest local retailers. The South Dakota law at issue in the Supreme Court case exempted small local businesses. It applied to out-of-town companies selling $100,000 or more a year to South Dakotans or doing 200 separate transactions in the state.
States would do well to follow South Dakota’s example. That would keep mom and pop businesses using sites such as Etsy and eBay from having to contend with the sales tax bureaucracy.
Likewise, Congress should consider devising a nationwide standard. Such uniformity would be better than leaving it to the courts.
In the meantime, this latest ruling has at least offered brick-and-mortar stores, already hurt by years of disadvantage, a chance to get a fresh look from local consumers.