Supreme Court expands online sales tax collection

Consumers expected to pay more on out-of-state purchases

Fred O. Williams
Senior Reporter
Expert on consumer credit laws and regulations.

Supreme Court

States can collect sales taxes on many more online transactions than they already do, under a Supreme Court ruling Thursday.

Consumers in the 45 states that charge a sales tax will feel the impact, with the typical state sales tax being between 3 and 6 percent. Credit cards and debit cards are the primary payment mode for online transactions.

But the costs won’t happen right away, and there will be some important exceptions as the ruling is put into practice.

Here are questions and answers about the costs consumers are likely to face, based on the text of the decision and interviews with retail industry experts. (Story continues after video.)

See related: 6 ways to safeguard cards when shopping electronically

What did the ruling say?

By 5 to 4, the court upheld a South Dakota law that requires online merchants (and other out-of-state sellers) to collect sales taxes on purchases made by South Dakota residents.

Previous court rulings had allowed online merchants to skip collecting sales tax, as long as they didn’t have a substantial presence there like a store or warehouse.

How much more will consumers pay?

Based on 2017 figures, a study by the Government Accountability Office estimates the annual impact on consumers between $8.4 billion and $12.5 billion. That’s on an estimated sales base of roughly $480 billion.

Of the sales total, about 71 percent is from internet retailers, 18 percent from e-marketplace vendors and 12 percent are other remote sellers such as telephone and mail-order.

When will the sales taxes be collected?

States that want to follow South Dakota’s lead will need to enact their own laws, if they haven’t already. That could take months in many cases. Or, Congress might step in with a uniform law nationwide, as suggested in the Supreme Court’s ruling.

Are all internet sales affected?

Many of the largest online retailers, such as Amazon, already collect sales tax in all or most all U.S. states because they have locations all over.

According to the National Retail Federation, seven of the 10 largest online vendors are big national brick-and-mortar chains with operations around the country.

What about very small retailers on sites like eBay and Etsy?

South Dakota’s law exempts retailers with less than $100,000 of sales in the state or fewer than 200 separate transactions there annually. Since the Supreme Court gave South Dakota’s law its stamp of approval, other states are expected to make similar exceptions for sellers with minimal volume.

“South Dakota affords small merchants a reasonable degree of protection,” the court’s decision says.

 Why change the law now?

The restriction on sales tax collection dated from a 1992 ruling, before today’s robust internet commerce system, the court’s decision said. States may not impose “undue burdens” on interstate commerce.

But today’s technology enables out-of-state sellers to charge state sales taxes easily, the court ruled. The court also said that an agreement between more than 20 states, called the Streamlined Sales and Use Tax Agreement, helps retailers know how to charge sales taxes from one state to the next, reducing their administrative costs.

Aren’t people already supposed to pay their state sales taxes?

Technically, residents of the 45 states that charge a sales tax are already supposed to pay taxes on online purchases and other out-of-state transactions, if the retailer doesn’t collect them.

But compliance with the rule is thought to be very low. South Dakota alone estimates it will collect $48 to $58 million more a year when out-of-state merchants begin collecting the sales tax.

The case is South Dakota versus Wayfair Inc.

Sources: National Retail Federation, GAO, Sales Tax Institute, Supreme Court documents.


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Updated: 09-21-2018