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Sales tax parity: Supreme Court wisely nixes online retailer benefit

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The U.S. Supreme Court recently ruled that states may ask online retailers to collect and remit sales tax.

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The U.S. Supreme Court cut online retailers a break in 1992, ruling states couldn’t force them to charge and remit sales taxes unless the retailers also had a physical presence there.

At the time, online sales were in their infancy, and the ruling gave them a chance to get going. Now, they’re going like gangbusters, and the court last week issued a new ruling, long overdue, that permits states to require online vendors to charge, collect, and remit the taxes.

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Since 1992, brick-and-mortar stores have faced a crushing disadvantage because they were adding sales tax to the cost of their items while many online retailers were not. Customers in growing numbers have embraced the convenience and effectively “tax-free” benefits of online shopping, even if they sometimes had to pay for shipping. As online purchases mushroomed, traditional retailers like Sears and Kmart have had to shrink their footprints in many communities that relied on them for jobs and real estate taxes.

States suffered, too, collectively losing billions of dollars a year in sales tax. Some states have been telling consumers to remit the sales tax themselves if online purveyors didn’t charge and collect it. But that was an enforcement nightmare, and states got far less than they should have.

South Dakota tried its own fix, telling online retailers to remit sales tax if they had 200 or more transactions or sales of at least $100,000 in the state each year. When Wayfair, Overstock.com, and Newegg balked, the state sued them, leading to Thursday’s ruling in the case that became known as South Dakota vs. Wayfair.

The court ruled that the 1992 decision “creates rather than resolves market distortions” and “has come to serve as a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a state’s consumers — something that has become easier and more prevalent as technology has advanced. Worse still, the rule produces an incentive to avoid physical presence in multiple states.”

The court’s 5-4 decision spanned ideological lines, with liberal Justice Ruth Bader Ginsburg and conservative Justice Neil Gorsuch with the majority and liberal Justice Sonia Sotomayor and conservative Chief Justice John G. Roberts Jr. among the dissenters.

The new ruling levels the playing field for traditional retailers. But some analysts have said it is “too little, too late” to help some, including Sears. The impact on states remains to be seen.

The impact will vary from one online retailer to another. Amazon already collects and remits sales tax on items it sells. In two states, Washington and Pennsylvania, it also does so for third-party sellers using its platform.

Critics of the ruling fear that collecting taxes at different rates for 50 states will stifle e-commerce start-ups and mom-and-pop businesses operating out of their basements. But technology surely exists to help these entrepreneurs collect and pay the taxes in an efficient manner.

Besides, other small businesses have been operating at a disadvantage since 1992. As the Supreme Court noted last week, the old ruling meant a small business with “a few items of inventory in a small warehouse” had to collect and remit sales tax, while a giant internet retailer did not.

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