The Internet Sales Tax Feeding Frenzy Has Arrived

The Supreme Court made a momentous ruling on internet sales taxation just days ago that has been poorly explained and frequently misunderstood, so here’s the deal.

What the SCOTUS did in the case of South Dakota v. Wayfair is uphold a state law that allows South Dakota to force online retailers outside of its borders to collect state sales taxes for them. The Supreme Court decisions that Wayfair overturned held that states could only tax sales from businesses that had a physical presence within their own borders.

This ruling opens the doors to a feeding frenzy of cash-strapped states to grab their share of out-of state sales revenues at the expense of hapless businesses, which have to figure out to comply with this new world.

In other words, if you’re an online seller in Oregon, which has no sales tax, and conduct enough business with customers in South Dakota (their threshold is $100K in sales), you can now be forced to collect sales taxes on those transactions and send the money to South Dakota. If this practice becomes more widespread (and it will), it means retailers in any given state will become the tax collectors for every state. Making online sellers liable to comply with the convoluted tax codes of dozens of states is an absolute nightmare, and comes with the bonus risk of being audited by many states all at once.

There is a common myth that internet sales tax enforcement will help balance the scales for main street brick-and-mortar businesses against the online behemoths such as Amazon. Here’s the thing: states already had the legal ability to enforce tax collection of online sales emanating from within their borders, and some already do. So you could have your “fairness” in the form of more tax collection while keeping the grabby hands of state tax men inside their own borders. But the big states with higher sales taxes are also the states with the most dire fiscal situations (think California, New York), and they see every item bought from out of state as missing an opportunity to get a cut.

And don’t shed a tear for Amazon either. In spite of some early headlines claiming that the Wayfair decision was some sort of giant blow to your favorite sender of smiling cardboard boxes, Amazon has been lobbying for federal online tax legislation ever since it realized that faster delivery times would require it to have physical warehouses (thus forcing it to collect taxes) in every state anyway. This hurts their smaller competitors who are less able to absorb the costs of compliance. Textbook corporate cronyism.

So borderless internet sales taxation will feed the black hole coffers of ravenous, out-of-control state governments while making it harder for online sellers to compete with the giants who dominate the space.

It’s not going to save brick-and-mortar business who fail to adapt to modern commerce either—online sales aren’t going to suddenly go away in spite of government’s best efforts. But greedy state governments may very well stifle competition and innovation at the cutting edge of commerce.

Andrew Moylan at the National Taxpayers’ Union summarizes the gravity of the threat better than I can:

“The internet is vast, powerful, and borderless. With today’s decision, the Supreme Court has effectively handed states tax power that is similarly vast, powerful, and borderless. The result will enrich state tax collectors and auditors at the expense of retailers, startups, and consumers across the country. This decision threatens to dim the lights of America’s vibrant, shining internet economy.”

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Josh Withrow

Josh Withrow is the Director of Public Policy at Free the People. He transitioned from studying medieval history to modern policy, only to find nothing has changed.

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