A multibillion-dollar argument that will directly affect consumers, cash-strapped states and companies large and small goes before the U.S. Supreme Court Tuesday.
More than 50 years ago, the justices ruled that companies do not have to collect sales taxes for out-of-state purchases. The court reaffirmed that ruling in 1992, but that was before the Internet revolutionized the economy. Now the court has decided to take another look at the issue.
When Amazon founder Jeff Bezos, at age 30, started selling books online out of his garage in Seattle, he had no idea that Amazon would become the online behemoth it is today.
“What’s actually happened over the last four years, you know, I’m the most surprised person on the planet,” Bezos told NPR in 1999.
So perhaps the Supreme Court can be forgiven for being less prescient in 1967 when it ruled that states didn’t have to collect sales taxes on out-of-state purchases, unless the seller had a bricks-and-mortar presence within the state’s borders.
By 1992, the justices were getting a little uneasy, in light of the growth of catalog sales. But they reaffirmed the sales tax decision nonetheless.
Then came the online commerce explosion. And states began to feel the pinch in terms of lost revenue from sales taxes and mom-and-pop stores being forced out of business.
‘Somebody get me a bill’
Forty-five states rely on sales taxes for revenue, and for those states that have no income tax, sales taxes are very important. Estimates of how much money the states are losing vary dramatically, ranging from more than $200 billion over five years to a recent estimate from the Government Accountability Office of between $8 billion and $13 billion per year.
For much of the last decade, states have been pressing Congress to fix the problem, to pass a bill that levels the playing field. But Congress, buffeted by anti-tax groups, has walked away from the issue.
“I was in D.C. about once a month lobbying this issue, and I became increasingly frustrated,” said South Dakota state Sen. Deb Peters, who is also president of the National Conference of State Legislatures.
She finally lost her temper: “I basically blew up and said, ‘I need a bill. Somebody get me a bill.’ “
The idea was to pass a bill that required out-of-state sellers to collect sales taxes as a way to challenge the U.S. Supreme Court’s prior decisions. The bill passed the South Dakota legislature, and was invalidated, as predicted by the state courts. That, in turn, enabled the state to appeal to the U.S. Supreme Court, where all indications are that at least some of the justices are ready to re-examine the old precedent.
Indeed, Justice Neil Gorsuch once called the current system “a judicially created tax shelter.” And, in 2015, Justice Anthony Kennedy suggested he was prepared to overrule the Supreme Court’s 1967 and 1992 decisions in light of modern realities.
Small Businesses ‘Getting Crushed’
On one side of the case argued Tuesday are the states, almost all of them with sales taxes. And on the other side are online companies, in this case, retailers Wayfair, Overstock and Newegg. They point out that they, like many other successful online companies, are already paying state sales taxes in an increasing number of states, often because they now have warehouses or stores in many places.
“This issue of collection of sales taxes is really a self-correcting problem,” their lawyer George Isaacson said.
Amazon, the biggest of the online giants, is not part of the case. It now collects sales taxes everywhere, but only on direct purchases from Amazon, and not on purchases from third-party sellers, which account for roughly half of the company’s sales.
The two sides in Tuesday’s case agree on almost nothing — not the economic facts, not the amount lost in sales taxes, not even on who is hurt by the court’s prior decisions. Each side contends that the other’s solution will annihilate small businesses.
Main Street retailers “are getting crushed because their costs are higher than Internet retailers,” said lawyer Eric Citron, who represents South Dakota.
Small retailers even have a name for what happens. It’s called “show-rooming.” People come into a Main Street store, ask to look at particular products, and then buy the one they like online because the price is 5 to 10 percent cheaper without the sales tax.
What’s Taxable? Every State Is Different
Countering that argument is Andrew Pincus, who represents eBay and small business sellers that operate on eBay platforms. He calls the idea of leveling the sales tax playing field a “business killer.”
“The reality is that these [online] small businesses are just going to go out of business, because they can’t absorb the costs,” he maintained.
In short, his argument goes, given the fact that there are roughly 12,000 tax-collecting state and local jurisdictions in the country, small and medium-sized online businesses will simply not be able to afford to set up the systems needed to calculate sales taxes.
Peters, however, counters that “the idea that this is too complicated is absolutely laughable to me because businesses are doing it today.”
As an accountant, Peters’ clients are often mom-and-pop stores. “I set up businesses on software every day where they can collect and remit on their sales,” she said, adding, “whether it’s in South Dakota or Florida.”
Citron added that “it’s all managed by algorithm.”
Indeed, 24 states, representing 30 percent of the population have already agreed to a system that that provides the software for free.
However, on the other side, eBay’s Pincus said the more populous states like New York and California have complicated rules for which objects are taxable, and at what rate.
“Just to give a few examples,” he said, “in Minnesota blankets are taxable, but baby receiving blankets are not taxable. In Texas, deodorant is taxable, but deodorant that has an antiperspirant is not.”
The cost for a system that deals with these variations, he said, can be $200,000 up front.
While both sides in this debate agree that it would be best for Congress to deal with all these issues, the fact is that Congress has turned a blind eye. And that, for now, leaves it up to the Supreme Court to decide whether it wants to stick with the rule it established a half century ago when the marketplace was a very different place, or not.