Thursday, April 26, 2018

Internet Sales Tax: A Game Changer?

Have you been paying sales tax on your online purchases?

A 1992 US Supreme Court ruling says that a state can only require a retailer to collect sales taxes if the businesses has a physical presence - a store, office, distribution center - in that state. Therefore, if an online retailer is not required to add the tax, the consumer is still expected to remit the sales tax that should have paid to the resident state in the form of a use tax. Most states include a line their income tax forms where they ask you to declare any use tax you might owe on such purchases.

For obvious reasons, that doesn’t work very well, and the 45 states in that situation have been pushing Congress to address that ruling. According to the National Governors Association, these states maintain that they could collect an estimated $26 billion annually in sales taxes on products sold online and via mail order. Although Congress has addressed the subject of internet sales tax collection from time to time, there has never been a serious attempt at taking it to a vote. But things may change very soon.

A recent case involving the State of South Dakota v. Wayfair Inc. is now in the hands of the Supreme Court. The case revisits the 1992 Supreme Court rule. This standard is outdated, South Dakota’s attorney-general told the justices, and deprives states of “massive sales tax revenues that we need for education, healthcare and infrastructure”. On day one of the Supreme Court debate, justices expressed concern that allowing states to reach outside their borders to collect sales taxes could create messy legal questions and endless litigation, with some saying it would be best for Congress to resolve the matter.

While states potentially have much to gain here, it is questionable how much brick-and-mortar retailers do. It has long been the belief that online retailers have a distinct pricing advantage compared to their brick-and-mortar competitors. The online advantage wasn’t so attractive years ago when shipping charges more or less offset the tax-free advantage. However, as Amazon and others began offering free shipping, internet pricing became much more appealing to consumers. And thus began the snowball effect, the substantial shift of shopping patterns from brick-and-mortar to online purchases. But when it’s really broken down, is too much being made of the adverse effect that tax-free internet shopping has on brick-and-mortar?

There’s no question that lower price is a frequent response when consumers are asked why they prefer to shop online. But is sales tax really a factor? It’s highly doubtful.

First of all, any large retailer with a physical presence in a state is currently charging sales tax now on an online purchase: Walmart, Target, Macy’s, Kohl’s, JCPenney, Home Depot, Lowe’s, Best Buy, Costco, CVS, and Nordstrom all are. And Amazon taxes shoppers in every state where applicable. The argument put forth on behalf of brick-and-mortar retailers by the National Retail Federation is largely that Congress should support the little guy and level the playing field so that all sellers play by the same sales tax rules. But in the ever-changing world of omnichannel retailing, small sellers need an online presence as well.

Whether the Supreme Court does it or it’s handed back to Congress, a change in the sales tax rule should be deliberated very carefully. If small retailers with both a physical presence as well as an online platform are required to collect sales tax for online purchases, will they have the wherewithal to get it done? It could be that burden, and the expense, are too big to bear. Consequently, a change in the online sales tax rule may be just the thing that drives some of these smaller retail firms out of business.

It may well be that a substantial change in the state sales tax rule would turn out to be a game-changer for brick-and-mortar retail – but maybe not in the way they hope.

Bob Sheehan, VP of Research
BSheehan@KeyPoint Partners.com



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