While online retailers rake in Cyber Monday sales, states face the loss of an estimated $23 billion in sales tax revenue annually because of laws that prohibit most online tax collections. The U.S. Supreme Court declined Monday to hear a case that might have settled the issue.
The question is whether states can impose sales taxes on online sales from locations outside their states. Such collections are currently banned unless the seller has a physical location in the state, but some states have tried to impose the taxes anyway.
For example, if Amazon has a distribution center in your state, you pay sales tax on that purchase, but if the seller doesn’t, there’s no tax. This has led to a crazy-quilt of collections.
According to the nonpartisan, anti-tax Tax Foundation, 12 states have adopted laws that allow them to collect state sales taxes from out-of-state Internet sellers anyway, using criteria such as having an “agent” or a “local affiliate” of the company in the state. Those states are: Arkansas, California, Connecticut, Georgia, Illinois (struck down by the state supreme court), Maine, Minnesota, New York, North Carolina, Rhode Island, Texas and Vermont.
The New York law was the focus of the U.S. Supreme Court on Monday. The high court’s decision—with no elaboration— not to take the case leaves those laws alone. Illinois has appealed to the U.S. Supreme Court in a separate case, giving the high court another opportunity to potentially weigh in.
“This decision further illustrates why a national solution is needed to level the playing field for local brick-and-mortar retailers and help them compete more effectively against out-of-state internet sellers,” said Sen. Richard Durbin, D-Ill.
Cyber Monday is expected to be the busiest online shopping day of the year. The National Retail Federation projected more than 131 million people will shop on this single day, up about 2 percent from last year. And the research firm comScore expected Cyber Monday estimated sales of $2 billion, up from about $1.47 billion last year.
States are backing federal legislation called the “Marketplace Fairness Act” that would allow sales taxes to be collected no matter where the purchase is made on the internet. The Senate passed it in May and President Obama supports it.
The House has yet to vote, but House Judiciary Committee chairman Bob Goodlatte, R-Va., has indicated he is mellowing on the legislation, which has been opposed by anti-tax groups. Goodlatte had been concerned that the tax would be a burden for small business, but he suggested if the tax is made simple and inexpensive, he could look at it favorably.
The National Governors Association favors the bill, calling it common sense legislation that upholds the principles of federalism and levels the playing field between Maine Street and e-street—and would give states a way to collect some of the estimated $23 billion lost annually from online sales. The National Conference of State Legislatures estimates the amount of "lost revenue" by state.
Online retailers had been the biggest opponents of the legislation, but that has begun to change with the decision of Amazon and Wal-Mart to support the bill. The big companies say it’s unfair to require businesses to collect sales taxes only in states where they have a physical presence.