Online Taxes Could Suffocate Small Retailers

From electronics to clothing, from toys to streaming subscriptions, consumers bought more than 100 million products on Amazon’s annual global shopping day, Prime Day. We were stoked about amazing deals. Most people, however, don’t know how a Supreme Court ruling will affect, for the worse, their online shopping going forward.

The Supreme Court overturned the 1992 Quill Corp. v. North Dakota ruling last month that had barred states from collecting sales tax from retailers with no “physical presence,” or brick-and-mortar stores, in those states. That bar is no longer in place. It is replaced by what is widely seen as a mandate to collect.

The ruling concerns small business advocates who see it as government interference in business.

“It’s taxes and regulation all combined in one unfortunate tax,” says Raymond Keating, chief economist with the Small Business & Entrepreneurship Council.

Those who already own brick-and-mortar storefronts, however, see the ruling as a way to “level the playing field” when it comes to their online competition.

This new ruling impacts any online retailer, but experts argue that because e-commerce giant Amazon had already been collecting sales tax in every state, it isn’t as directly impacted as its competition like Wayfair and Overstock.

But even if Amazon might win in the long run, third-party merchants and consumers won’t.

A Tax Punt

Amazon already collects sales tax on the products it sells directly. The ruling isn’t clear about where the responsibility for collecting the tax on items sold by third-party merchants falls. These third-party merchants represent half of the sales currently made on Amazon, and they now potentially face adding a bureaucracy for collecting sales tax if they weren’t already collecting it before the ruling.

Paul Rafelson, a law professor at Pace University, told CNBC that Amazon is essentially “punting” these questions over to the merchants. “Amazon can hide behind its marketplace to claim tax exemption because it’s still going to pretend it’s not a retailer — and not responsible for collecting sales taxes,” Rafelson said. “There’s still a lot of legal questions that need to be answered.”

Qualifiers in the Making

In anticipation of the ruling, states like Vermont and Massachusetts passed their own laws to collect sales taxes from online sales, but the laws have very specific qualifiers.

For example, Vermont requires that companies have advertised in the state and have made at least $100,000 in sales or 200 transactions in the previous year. Vermont’s sales tax is “destination-based,” meaning it only applies apply when the buyer takes physical possession of the item inside Vermont’s borders.

According to the Tax Policy Center, states collected more than $400 billion from sales taxes alone in 2014. Two-thirds of that revenue ($272 billion) came from general sales taxes, and one-third ($140 billion) came from selective sales taxes on products like alcohol and tobacco. Local governments collected $105 billion from sales taxes in 2014, with $75 billion coming from general sales taxes and $30 billion from selective sales taxes.

That’s a lot of money government makes off of the 28 million small businesses in the United States. And when more than 22 million of those small businesses are individually operated, being forced to charge online sales taxes will make it harder for them to compete in the market, hire new employees, or expand their businesses.

Ironically, complying with this ruling means using expensive software that keeps track of collecting sales taxes nationwide.

State and local governments don’t need any more of our money to feed their budgets through taxes, whether they’re taken from online sales or not. We should be free to drop whatever we want into our virtual (or real) shopping carts in peace without government sweeping in to get a cut.

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