The U.S. Supreme Court ruled Thursday that internet retailers can be required to collect sales taxes from states where stores lack a physical presence.
In Oregon, where there is no sales tax, small businesses are worried they’ll have to buy expensive software to determine how much to charge for each purchase from each state.
Oregon Sen. Ron Wyden, the top Democrat on the Senate Finance Committee, said he’ll do everything he can to stop what he described a “catastrophic decision.”
“Oregonians selling their goods online will now be extorted by a litany of software providers and their allies in state governments,” he said. “They’ll need to pay multinational corporations a pretty penny to comply with an endless web of new tax jurisdictions.”
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Take the scenario where a guy from New York City buys a bike online from an Oregon company. Before the ruling, he didn’t have to pay the 8 percent New York sales tax. But now he does.
Wyden thinks Oregon’s small businesses are being forced to carry the financial burden of other states’ taxes.
“That’s because local politicians desperate to find money to improve schools, roads and law enforcement will look for outside their borders to find it,” he said.
But Josh Lehner, an economist with the state of Oregon, doesn’t think the ruling is going to cause dramatic changes.
In the scenario where a New Yorker buys an Oregon bike, Lehner said it’s important to understand that if it was purchased through a large online retailer like Amazon, the likelihood is that the sales tax would have been paid anyway. That’s because Amazon and New York have negotiated an agreement to include sales taxes.
Lehner said most large retailers and most states have negotiated such sales tax agreements.
“I’ve seen estimates of up to two-thirds or three-quarters of online sales today are subject to sales tax because we’ve had these piecemeal … agreements between individual states and individual retailers,” he said.
“So there’s already a lot of sales tax collected online. It’s just now it’s going to be universal.”
Lehner thinks there are other factors that will limit the impact of the ruling.
The Department of Commerce says e-commerce makes up less than 10 percent of overall retail sales.
The vast majority of sales are still done through brick-and-mortar stores that have always been subject to sales tax. That’s because some things just don’t sell successfully online, like gas for your car.
The 5-4 ruling is seen as a victory for states that say they’ve been losing billions of dollars a year in sales taxes since 1992. That’s when the U.S. Supreme Court last ruled on online sales. Under that ruling, Quill Corp vs. North Dakota, many companies didn’t have to collect sales taxes. They only had to collect it when shipping the product to a state where the company had a physical presence — like a store or warehouse.
Customers were then meant to pay the sales tax themselves. But the vast majority of shoppers didn’t follow through.
This new lawsuit was brought by South Dakota, which has no income tax and therefore is heavily dependent upon sales taxes. South Dakota Attorney General Marty Jackley said South Dakota businesses will now have tax fairness and a level playing field.
In the decision, the U.S. Supreme Court estimated South Dakota was losing up to $58 million annually in sales taxes.
"The physical presence rule has long been criticized as giving out-of-state sellers an advantage. Each year, it becomes further removed from economic reality and results in significant revenue losses to the States,” the decision reads.
The court said that law effectively incentivized businesses to "avoid physical presence" in states and led to "a judicially created tax shelter."
"The internet's prevalence and power have changed the dynamics of the national economy," Justice Anthony Kennedy wrote in the majority opinion. "The expansion of e-commerce has also increased the revenue shortfall faced by States seeking to collect their sales and use taxes."
David Adkins, the executive director of the Council for State Governments called the decision a step in the right direction to ensure equitable taxation.
“This is a big win for states," he said. "The current tax law was out of step with how commerce is conducted today.”