Supreme Court Overturns Online Sales Tax Standard

Published July 12, 2018

States can require out-of-state businesses to collect and remit sales taxes on purchases made by in-state consumers, the U.S. Supreme Court decided.

The U.S. Supreme Court’s 5-4 decision Wayfair v. South Dakota overturns the Court’s 1992 decision in Quill v. North Dakota, which had established the “nexus” standard for business taxation.

Under the new standard, a business may be required to pay sales taxes to a state or local government even if it has no physical location, or nexus, in the taxing jurisdiction.

Court vs. Competition

Charles Steele, an associate professor of economics at Hillsdale College and a policy advisor for The Heartland Institute, which publishes Budget & Tax News, says the court’s ruling badly undermines market competition and innovation.

“This is purely a story of market competition, and the tax issues are a marginal matter,” Steele said. “SCOTUS ought not to be interfering with market competition. Consumers are hurt.

“The alleged tax disadvantage for brick-and-mortar establishments is brick and mortar,” Steele said. “They have high overhead costs, and they also have high labor costs associated with sales staff and tend to be poor innovators compared with online merchants. Shopping mall vacancies are the highest they’ve been in six years, and this is in a booming economy. People simply prefer shopping online.”

Disputing Court’s Premises

Steele says remote sales have been a part of the U.S. economy for a long time.

“The [Court’s] majority opinion claims that sellers without a physical presence is a new problem because of the advent of internet commerce, but that’s false,” Steele said. “America has had robust mail-order commerce since the mid-1800s. Sears and Montgomery Ward are famous examples.”

Andrew Moylan, executive vice president and director of the Interstate Commerce Initiative at the National Taxpayers Union, says the internet is a success story of free-market principles and the Wayfair decision will inhibit the spread of prosperity.

“One of the biggest success stories we have from the free market is the invention of the internet, which allows any small business owner or innovator making something out of their garage or home to reach a national market, versus being confined to a storefront that would have a very limited market,” Moylan said. “The internet really democratized retail, and this new Supreme Court decision really undoes the entire development.”

Burden on Small Businesses

Moylan says owners and customers of small businesses will bear the costs of the Court’s decision.

“What makes this so crucial for small businesses is that your larger retailers will find this difficult to comply with, but not particularly, because these are multibillion-dollar companies that have teams of attorneys and accountants,” Moylan said. “It would be a nuisance for them, but it wouldn’t disrupt their commerce. Many smaller, locally owned businesses would potentially have to face up to 12,000 taxing jurisdictions across the country, audits in 45 different states, and potentially be dragged into courtrooms across the country if they can’t navigate all of the different sales taxes and regulations.”

Steele says the court’s ruling creates a big advantage for brick-and-mortar retailers and large online companies.

“The majority opinion assumes it is not that difficult for sellers to comply with sales tax laws, but this is entirely misleading,” Steele said. “Sales taxes are not limited to states. There are a variety of local, county, and state taxes on a wide variety of goods. A brick-and-mortar establishment can easily learn what tax laws apply in its jurisdiction. Large firms have economies of scale in dealing with taxes and regulations and will benefit at the expense of their smaller internet competition.”

Suggests Origin-Based System

Instead of a destination-based sales tax system, retail sales should be taxed where they originate, Moylan says.

“Today, about 91 percent of retail sales happen in brick-and-mortar stores, which means that 90 cents on the dollar are still being spent in these stores, where their taxes are based on where the business is located,” Moylan said. “The best solution would be to extend the standard that 91 percent of these stores get, to the remaining 9 percent, which would base taxes solely off of what state your business is located in, where owners have a presence, where they pay taxes, and where they vote,” Moylan said.

“‘No regulation without representation’ is a simple standard that ensures that a tax cannot regulate an entity unless the business is in the borders of a state,” Moylan said. “This would stop a lot of the state overreach that is going on and would end the predatory actions targeting out-of-state entities.”