If you ever pick up a deal on Amazon, Overstock.com, or other online retail sites, you should pay close attention to last week’s decision by the U.S. Supreme Court allowing states to more easily collect sales taxes from online sellers.
The cost of buying online is already set to go up and may go higher depending on what the Idaho Legislature does over the next year or two in response. On the hand, the leveling of the “paying field” will benefit brick and mortar local retailers.
Local retailers in Idaho have long complained loudly that it is unfair for online retailers to avoid Idaho’s sales tax, automatically giving them a 6% price advantage. Today, online sales are estimated to be 10% of all retail sales --- and growing at four times the rate of offline sales.
By a 5-4 vote in the case of South Dakota v. Wayfair, Inc. the Supreme Court justices overturned a 1992 case that said states could only tax retailers with a substantial physical presence in their state. That allowed most online companies to offer their goods free of sales tax in most locales as most don’t have a facility in most states.
At issue was a South Dakota law that said that any online business that did more than $10,000 in annual sales in South Dakota had to collect South Dakota’s sale tax on those sales. That law was illegal under the Court’s previous 1992 decision that involved catalog sales.
Idaho joined in South Dakota’s effort, signing onto an amicus brief with 34 other states urging the Supreme Court to allow taxing online sales by sellers without a physical presence.
Even before this decision, the ground has been tilting. In anticipation of change by the Supreme Court or Congress, massive online retail giant Amazon had already cut deals with most states to collect and remit sales taxes. Idaho has such an agreement with Amazon.
In its decision, the Supreme Court cited data indicating states lose as much as $33 billion from sales taxes not being collected by online retailers.
In the past, one of the key arguments has been that it is unfair to online retailers to have to collect for 50 different states. The majority opinion authored by Justice Anthony Kennedy dismissed that argument, completely decoupling compliance from the previous standard of physical presence: “[T]he administrative costs of compliance, especially in the modern economy with its Internet technology, are largely unrelated to whether a company happens to have a physical presence in a State.”
The Idaho Legislature this year anticipated this decision and passed a bill sponsored by Rep. Lance Clow (R-Twin Falls) to apply Idaho’s sales tax to online retailers who have an affiliate seller in Idaho that does more than $10,000 a year in business here. It is estimated to generate $22 million to $37 million a year in new state revenue.
That measure was still predicated on the existence of some sort of physical presence. So, for instance, Macys’ online store will need to collect Idaho sales tax on online sales because it also has retail stores in the state.
But, with the expansive Supreme Court decision, will Idaho now push the envelope further, perhaps moving to a requirement that all retailers who sell more than a particular dollar amount must pay Idaho’s sales tax? I predict Idaho retailers will ask for exactly that to reduce further any competitive advantage their online competitors might have.
But, there is another interest in play, and that is Idaho’s online buyers. If you shop online, you will pay more. Will Idaho consumers blame price increases on the new sales taxes? If so, legislators may react and give some pushback to an expansion.
Also look for a possible intervention by the U.S. Congress (which has foot dragged on this issue for years), establishing some sort of national system to standardize the process for online retailers to collect state sales taxes.