Independent showrooms face a ton of competition online, and though many showrooms can compete well online with their own e-commerce stores, there's one major benefit that online-only retailer enjoy over local retailers: sales tax.
Under the precedent set by Quill v. North Dakota, online retailers did not have to collect sales tax from consumers unless they had a physical presence in the state. That may seem like pennies, but when you're selling sofas, casegoods and other expensive furniture and lighting online, sales tax makes a big difference to consumers, and it can put independent retailers at a major disadvantage.
Now the game may be changing, and the playing field may be leveled. Last month, the U.S. Supreme Court agreed to hear South Dakota v. Wayfair, a case that takes another look at sales tax and e-commerce. Here's why the justices have good reason to side with South Dakota and what you need to know now.
How South Dakota v. Wayfair came about
The nine justices on the U.S. Supreme Court weighed in on Quill v. North Dakota back in 1992 — long before Amazon Prime and free two-day shipping. The case started because North Dakota tried to force Quill, a Delaware-based company, to pay sales tax for office equipment sold in North Dakota via flyers, sales catalogs and phone calls.
The justices voted in favor of Quill, with Justices Antonin Scalia, Anthony Kennedy and Clarence Thomas writing the concurrent opinion. They based their ruling on the Commerce Clause, a constitutional law that allows the federal government to step in and regulate interstate trade and stop unfair trade policies between the states. The Commerce Clause set a higher bar for determining whether a business had a physical presence in a state or not. Out-of-state businesses that only had contact with the taxing state through the mail and local carriers did not meet the Commerce Clause's definition of physical presence. Therefore, Quill did not have to pay taxes to North Dakota, and the precedent was set.
No one, let along the Supreme Court justices, could have predicted the e-commerce explosion that would happen online. At the time, so few American households had internet access (54 percent of U.S. households wouldn't have internet access until 2000, according to the U.S. Census Bureau), and Google wouldn't hit the internet until 1997.
But as e-commerce grew on the internet, online retailers cited Quill v. North Dakota when states tried to go after them for sales tax. The loss of sales tax put local businesses at a disadvantage, and it took away income from state and local treasuries. As Bloomberg reported, the Government Accountability Office estimated that states lost $13 billion in revenue in 2017 from online retailers who don't charge sales tax. For the most part, the online retailers have been successful in avoiding sales tax, though in 2012, Amazon caved to pressure and started collecting sales tax in some states though it does not collect taxes on third-party sales on its website. In 2013, lawmakers attempted to enforce sales tax collection through the Marketplace Fairness Act, but the bill never got enough traction to pass the House of Representatives and the Senate.
In 2015 while writing a concurrent opinion on Quill-related Direct Marketing Ass'n v. Brohl, Justice Kenndey called for an urgent review of Quill, noting that the loss of sales tax was a "serious, continuing injustice faced by Colorado [the state where Direct Marketing Ass'n v. Brohl originated] and many other States." Many lawmakers across the country took Kennedy's opinion to mean that he was open to changing or updating the ruling, so they began writing laws that would eventually be taken up by the Supreme Court. South Dakota was the first to finish.
Fast forward to May 2017. In preparing to put a law on the books, South Dakota sent notices to the four biggest online retailers that were doing business in the state — Wayfair, Overstock.com, Newegg and Systemax. Systemax agreed to start collecting sales tax, but the other three refused, citing the Quill ruling. So South Dakota went after each one, and the product became South Dakota v. Wayfair.
In October 2017, South Dakota filed a writ of certiorari to the Supreme Court, and last month, the court agreed to hear the case.
What you should know now
The Supreme Court will begin hearing arguments for South Dakota v. Wayfair in April 2018 and will release its ruling before the end of term in June 2018.
This bill could be a huge win for independent retailers competing against online giants like Wayfair and Overstock.com. If they too have to collect sales tax, prices on their goods will go up, and consumer decisions between Overstock and local competition may be more level.
There are some potential bumps to consider along the way. First, consumers may spend less online if they have to pay sales tax. This is probably unlikely considering a lot of states already require consumers to pay sales tax on online purchases right now, but in states where consumers are used to avoiding that extra 6 or 7 percent — especially on big-ticket items — this could be a problem. At the very least, it's worth keeping in mind.
The more substantial bump concerns state sales tax laws and the varying complexity of them. Each state has their own laws and their own rates. Some are more complicated than others, and five states don't have sales tax at all. It may be difficult — and expensive — for online retailers to comply with all the different state tax laws. That's not saying it can't be done, but efforts such as Streamlined Sales Tax Governing Board, a board made up of 23 states, have been made to create a national sales tax and streamline sales tax collection across state lines. In time, we may have a national sales tax.
Both the American Lighting Assn. and the Home Furnishings Assn. will be watching this lawsuit closely. Make sure you're following progress on the case in April through June when the court makes its ruling.
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