State Tax Collectors Hit Lottery

by Raymond Pucci 0

income-tax

State tax collectors—start your engines! Yesterday’s Supreme Court ruling giving states the authority to collect sales taxes on out-of-state online businesses. As the following article from The Verge reports, there will be significant implications for many businesses.

In the wake of yesterday’s Supreme Court ruling, e-commerce companies are understandably both concerned and uncertain of their future. The 5-4 verdict overruled a 1992 precedent set by the case Quill v. North Dakota that only addressed mail-order businesses at the time, but it became a powerful legal bedrock for the e-commerce industry.

It let companies without a robust physical infrastructure thrive during and after the dot-com boom by exempting purchases from sales tax, so long as the seller did not have a physical operation in the state where the customer resided. Now, following the court’s decision, states can start charging sales tax on internet purchases even when a retailer has no physical presence in that state.

A number of retailers, from Amazon to Etsy to Overstock.com, may be impacted. It’s not necessarily because those corporations have been skirting sales tax collection, but some enable thousands of third-party sellers to do so, largely thanks to Quill v. North Dakota. In fact, Amazon, which last year started collecting sales tax in all 45 states that require it by law, may have a substantial amount of work to do to help its Amazon Marketplace sellers stay compliant. Yet we don’t know if that burden will fall primarily on Amazon or if it will be the responsibility of the sellers.

More than 50 percent of all sales on the site are conducted via third-party sellers, some of which use Amazon for fulfillment but otherwise operate independent small- to medium-sized businesses. A few companies, like Chinese electronics giant Anker, have thousands of employees and an international footprint, suggesting the ruling could alter the prices of popular products on Amazon and how companies like Anker are able to operate in the US. (An Anker spokesperson said it was too early for the company to comment on how the ruling would impact its business.) Etsy, eBay, and others are in similar boats. According to the US Government Accountability Office, as much as $13 billion in annual sales tax revenue is at stake.

At first glance, small online businesses will be hit hardest. Not only will the ruling create a mountain of tax record-keeping, but it will take away some pricing advantages that out-of-state merchants have had over brick-and-mortar stores. Spillover effects may also impact large online marketplaces such as Amazon that could lose some of their third party sellers. While the ruling is final, it will be worth watching how this will actually play out, given the thousands of state tax jurisdictions that will want a piece of the tax revenue pie.

Overview by Raymond Pucci, Associate Director, Research Services at Mercator Advisory Group

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