SCOTUS online sales tax ruling: A threat to small businesses?

The U.S. Supreme Court’s recent decision on states’ authority to collect sales tax from online retailers will have far-reaching implications for domestic businesses, unless states and policy makers act to reduce the compliance burden and prevent an unfair advantage.

The 5-4 opinion in Wayfair v. South Dakota authored by Justice Anthony Kennedy overturned a 1992 case that required only retailers that had a physical presence in states to collect sales taxes. Now states can force retailers without a physical presence to pay tax on sales. Many state-based groups including the National Conference of State Legislatures, who initially sponsored the law upheld by the high court, have been lobbying for a similar outcome for years. Experts believe that states now stand to gain millions of dollars in additional revenues given strong forecast for online sales in future.

A U.S. Census Bureau survey released in May indicates retail e-commerce sales increased to $123.7 billion in the first quarter of 2018, up 3.9 percent from the fourth quarter of 2017. Total retail sales were estimated to be $1.3 trillion for the first quarter of 2018. Online sales were estimated to be 9.47 percent of total sales for the first quarter of 2018.

Andrew Harrer/Bloomberg

However, the Supreme Court’s ruling could be troublesome for many small businesses. Depending on individual state guidelines, online retailers will now be required to not only keep track of the tax charged on sales, but also remit taxes back to those states where sales were made. This will certainly increase compliance costs for online businesses and eventually dampen economic activity.

“Today’s ruling threatens to stunt economic growth,” said Joel Griffith, director of the Center for State Fiscal Reform at the conservative American Legislative Exchange Council. “More concerning, it marks a departure from a constitutional understanding of federalism. Remote retailers — many of whom are small businesses — may soon be forced to keep track of the thousands of taxing jurisdictions across the country, many with their own rates, bases, rules and regulations.”

Domestic online retailers have long faced disadvantages from international retailers, who were already importing cheaper goods. Over 30 percent of the top 10,000 sellers on eBay are based in China. The recent Supreme Court ruling also benefits those foreign sellers, as it will be harder for states to track them and collect sales taxes. This dual unfair advantage will help international retailers increase their market share by offering lower prices compared to domestic retailers, who are now facing added compliance burdens.

Congress and the states must work together to formulate a strategy that will help domestic online retailers. One of the ways would be to close a tax loophole on foreign sellers. States should also help and encourage domestic retailers by sharing the compliance burden by not only providing an exemption for smaller transactions but also by increasing a percentage of a vendor credit/commission to domestic retailers for collecting sales tax on behalf of consumers. Upholding Quill v. North Dakota, together with measures to support domestic businesses, is essential for sustained economic growth.