States Pay the Price When You Buy Online

https://www.nytimes.com/2018/01/01/opinion/online-shopping-sales-tax.html

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Can online retailers be compelled by law to collect a sales tax? According to the Supreme Court, no — but that could change if, in the next few weeks, it decides to take up a case challenging the current rule.

The court should reconsider the prohibition, because the law takes a hammer to the fiscal health of states, which lose out on millions, if not billions, of dollars in sales tax revenue. Staggering amounts of digital transactions occurred this year: an estimated $6.59 billion in digital transactions on Cyber Monday (which would be a record), and an estimated $100 billion for the holiday season.

Customers may be confused: Some online retailers do collect sales taxes, at least sometimes. Amazon, for example, collects them on Amazon transactions, but not on third-party-vendor transactions sold through Amazon.

Why are online retailers intermittently collecting sales taxes on transactions? It’s because only online retailers that have a brick-and-mortar location (a so-called physical presence) in a state are legally required to collect the tax. South Dakota has asked the Supreme Court to re-examine that question in a dispute with online retailers including Wayfair and Overstock.

The current law can be traced to two cases: one from 1967, National Bellas Hess v. Department of Revenue of Illinois, and one from 1992, Quill Corporation v. North Dakota. In Bellas Hess, the Supreme Court ruled that the online retailers of their day, mail-order companies, did not have to collect sales taxes in states where they did not have a “physical presence.” In Quill, the court rejected North Dakota’s contention that the Bellas Hess precedent had been rendered obsolete by the tremendous growth of the mail-order and telemarketing industries.

Quill sold office supplies to North Dakota customers by catalog and by phone. But it had no employees in the state and insignificant other property. North Dakota argued that since Quill engaged in “regular and systematic solicitation” of North Dakotans, it was required to collect sales tax from them. Quill countered that having to collect the tax would unduly burden interstate commerce.

In deciding for Quill, the Supreme Court cited the “administrative and record-keeping requirements” that could “entangle” a mail-order house if it were subject to sales-tax obligations in every jurisdiction. These requirements, the court decided, were indeed undue burdens that would ultimately harm the national economy.

As the landscape of commerce has changed to e-commerce, the costs of the Quill decision have become starkly obvious. Brick-and-mortar merchants collect the sales tax at the point of sale. But since states can’t compel online retailers to collect sales taxes, they have to rely on citizens to report the tax (a “use tax”) on their income tax returns, making enforcement and compliance difficult.

The failure of e-commerce vendors to collect sales tax leads to broader problems. With the revenue shortfalls caused by under-compliance, states must either cut spending on services and public goods, like the police, or raise taxes on income, property and sales made by retailers that maintain a physical presence within the state.

So South Dakota essentially created a tax to provide a vehicle for the Supreme Court to reverse the Quill decision. The state required certain online retailers that did more than $100,000 worth of business in sales in South Dakota to collect the 4.5 percent state sales tax. When the online furniture retailer Wayfair challenged the tax, the South Dakota Supreme Court ruled against the state, citing Quill.

In early January, the Supreme Court will decide whether it wants to revisit the Quill case by taking up South Dakota’s appeal in the Wayfair case. I am one of the economists and law professors who have filed a brief urging the court to do so.

There are compelling reasons to overturn Quill. Most important, according to market analysis, state and local governments will lose about $34 billion in revenue in 2018 because of the physical presence requirement, a number that will rise to nearly $52 billion by 2022. In 1992, in e-commerce’s infancy, the loss was $700 million to $3 billion.

For their part, retailers say that out-of-state retailers should not be deputized as an agent of the state. That job, they say, is for the state to do, through the enforcement of the use tax. This is essentially the same argument made in Quill.

But Quill arguments are less compelling now than in 1992. For example, the administrative and record-keeping burden didn’t disappear under the physical-presence rule — it was merely shifted to consumers, who are left to comply with tax obligations on their own. And improvements in technology mean that collecting sales tax for different states isn’t nearly the burden for retailers that it would have been in 1992.

The Quill decision has now not only hurt states but also distorted behavior of big retailers: It discourages them from establishing a brick-and-mortar location (and creating jobs) in a new state and being liable for collecting its sales tax. Online retailers also enjoy state services — like roads that allow their products to be delivered efficiently to customers — without contributing to their upkeep.

Normally, one does not have an opportunity to fix a mistake. Let’s hope the Supreme Court in Wayfair takes advantage of that opportunity.

If not, you may notice worse roads because most consumers are not voluntarily reporting the use tax.