More than 40 states are asking the Supreme Court to reconsider a rule that allows a business to skip collecting a state’s sales tax if it is shipping to a state where it doesn’t have an office, warehouse or other physical presence.
The rule means that large retailers such as Apple, Macy’s, Target and Walmart, which have brick-and-mortar stores around the country, typically collect sales tax from online customers, while online-only sellers, such as 1-800 Contacts, Blue Nile, Chewy.com, Overstock.com and Wayfair, can often skip charging the tax.
According to the Associated Press, the states say that the rule, which comes from two decades-old Supreme Court cases, costs them “billions of dollars in tax revenue each year, requiring cuts to critical government programs.”
While states usually require consumers who weren’t charged sales tax on a purchase to pay it themselves, often through reporting it on their income tax returns, data shows that only about 1 percent to 2 percent of buyers actually do so.
In addition, large retailers want all businesses to “be playing by the same set of rules,” said Deborah White, the president of the litigation arm of the Retail Industry Leaders Association, which represents more than 70 of America’s largest retailers.
Many of these retailers have pointed to Amazon as a prime example of the unfairness of the rule, with President Donald Trump recently criticizing the eCommerce giant for paying “little or no taxes” to state and local governments.
However, since 2017, the eCommerce giant has been collecting sales tax in every state that charges it. Instead, a change in the rule will really affect third-party sellers that use Amazon to sell products.
In fact, small businesses that sell online say getting rid of the rule could drive them out of business.
“For small businesses on tight margins, these costs are going to be fatal in many cases,” said Andy Pincus, who filed a brief on behalf of eBay and small businesses that use its platform.
The case before the Supreme Court involves South Dakota, which has no income tax and relies on sales tax for much of its revenue. Its governor has said the state loses out on an estimated $50 million a year in sales tax that doesn’t get collected by out-of-state sellers.
While there is no indication which way the ruling will go, three justices — Neil Gorsuch, Clarence Thomas and Anthony Kennedy — have suggested they are willing to rethink the original rule.
“Although online businesses may not have a physical presence in some states, the Web has, in many ways, brought the average American closer to most major retailers,” wrote Kennedy. “A connection to a shopper’s favorite store is a click away regardless of how close or far the nearest storefront.”