Online Purchase Sales Tax Fight Heads to SCOTUS

Alfred Osborne
April 16, 2018

The South Dakota state capitol building is seen in Pierre, South Dakota, U.S., February 7, 2018. Clicking "checkout" on an online purchase could cost more after a Supreme Court case being argued April 17. But a case before the Supreme Court could change that. Wayfair Inc. essentially pits the 45 states that impose a sales tax against the handful that don't.

Wayfair, a Boston-based website that sells furnishings, opened two ME call centers in 2016, one in Bangor and one at Brunswick Landing, planning to hire close to 1,000 people.

States and traditional retailers are asking the court to overturn a 26-year-old ruling that exempts many internet merchants from collecting billions of dollars in sales taxes.

Retailers like Amazon, Walmart, Target, Apple and other major companies do now collect sales tax via their ecommerce channels, so that's not what this case is after.

On Tuesday, the justices will hear arguments in South Dakota v. Wayfair Inc.

Small retailers are not collecting state taxes from online shoppers unless the store has a physical presence in the state where the buyer lives.

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Large retailers want all businesses to "be playing by the same set of rules", said Deborah White, the president of the litigation arm of the Retail Industry Leaders Association, which represents more than 70 of America's largest retailers. But online-only merchants-especially the large number of independently-owned businesses on sites like Etsy and Ebay-worry that this is more of a cash grab by state and local governments.

The ability to avoid paying sales tax was one of the attractions of online shopping in its early days. Amazon collects sales tax on its own products, but not on other businesses' products that are sold through its website.

Overstock.com has a small but unmistakable advantage for anyone looking to buy a 3-cup Cuisinart Mini Prep Plus Food Processor for shipment to Germantown, Maryland: Purchasers don't have to pay the 6 percent sales tax they'd owe at a local store. But states have found that only about 1 percent to 2 percent actually pay. "For small businesses on tight margins, these costs are going to be fatal in many cases", Andy Pincus, who filed a brief on behalf of eBay and small businesses that use its platform, told the Associated Press.

The court showdown instead involves Wayfair, Overstock and Newegg, three retailers sued by South Dakota for not charging taxes to consumers there. Even retail companies without a physical store in South Dakota were required to follow the state law. The state, conceding it could win only if the Supreme Court reverses course, has lost in lower courts.

South Dakota and its allies say "physical presence" is an increasingly elusive concept in the era of internet storefronts and smartphone apps. Its inaction is why White and other opponents of the physical-presence rule say the court needs to step in. In addition, they said, the court can write a ruling that "applies prospectively only for all retailers and taxpayers".

It's unclear how the justices might align on the question this time. North Dakota, which says retailers only have to collect sales tax in states where they have a physical presence.

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