TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, January 2, 2018

Herzig: States Pay The Price When You Buy Online

New York Times op-ed:  States Pay the Price When You Buy Online, by David Herzig (Valparaiso):

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. ...

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.

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