Supreme Court Sales Tax Ruling Could Bury Online Small Businesses

adolescent-bag-beautiful-919436Think about this. When you make a purchase at a store, does the cashier charge you a sales tax based on where you are from or where the store is located? Personally, I’ve never had a cashier ask me for my state ID in order to figure out how much sales tax to charge me. That would be ridiculous and inefficient. Generally, sales tax has been based on where the business is physically located. The business sector has been progressively becoming more technology driven. Some of the most prominent companies in the world only operate online. Companies like Amazon have really changed the business environment in this way. Companies can sell their products globally without having a physical presence near their customers. Clearly e-commerce has been a growing sensation in the world. E-commerce currently makes up for about 10% of all US retail sales. That 10% share is about $500 billion in sales and is expected to grow exponentially.

Since the rise of e-commerce, there has been debates in the US on how these companies would be deal with the varying sales tax policies in each state. In 1992, the Supreme Court ruled that state governments may only impose a sales tax on companies that have a physical presence in their state. Earlier this week, the Supreme Court voted 5-4 to overrule their 1992 vote. Now states are allowed to require companies with no physical presence to collect sales taxes on transactions. Although they had good intentions, the Supreme Court’s ruling is not one I can get behind because of the potential economic damage it could cause.

Before I explain why this overruling is wrong, let’s talk about why the Supreme Court chose to do so. Their decision really starts with helping state governments. When a company has a brick-and-mortar store in a state it is easy for the state government to collect sales taxes. It gets a lot trickier when sales are made in state by a company who does not have a physical presence there. As I stated earlier, the 1992 ruling allowed companies to disregard charging a sales tax on transactions that are outside of its operating state. This creates a funding problem for state governments because customers are choosing to buy products online with omitted sales taxes rather than shopping locally. Customers were expected to report their purchase and pay sales taxes to the government in prior years, but only 1% did. While the rise of e-commerce has increased retail revenues, it has also prevented states from collecting taxes on such revenue. The 1992 ruling prevented states from collecting about $13.4 billion last year alone. This is a good amount of money that could help states fund social programs. So, this ruling is definitely favorable towards the states looking for more funding.

Another big factor in the Supreme Court’s ruling was that the previous ruling gave an unfair advantage to online companies over the local brick-and-mortar companies. Justice Anthony Kennedy states that the 1992 ruling was a “a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a state’s consumers”. Consumers may be more inclined to buy from a company that does not charge a sales tax at transactions. The ruling could help promote the local brick-and-mortar businesses. South Dakota Governor Dennis Daugaard supported the ruling by saying “with today’s ruling, all businesses will compete on a level playing field,”. In the Supreme Courts mind, they have fixed an outdated ruling that was based on mail-order catalogs in the 1990s. Their prior ruling did not take into account the growth of companies like Amazon, eBay, Wayfair, and other companies that have revolutionized retailing. People in support of this ruling rely on arguments that support fair business and taxation practices. They also say that this ruling is not as drastic as it seems. The ruling is not an added tax, but just a better way to ensure that people are paying all of the required taxes. As you can see, the reasons behind the Supreme Court’s ruling are valid. So, I will not argue against them. I support fair business competition and proper government funding. But I can’t support the damage that the government is going to throw at small businesses.

Many people in the US dream about starting their own business, but the cost of running a brick-and-mortar business are steep. Online businesses have given many people the opportunity to pursue their dreams of running a small business. Small businesses are the heart and soul of the United States economy and e-commerce has made them stronger than ever. Under the current taxation policies that run through the United States, this ruling could prove to be detrimental to the economy. Each state that enforces a sales tax is different. Variances can occur in tax rates or how certain products get taxed. There are over 10,000 sales tax jurisdictions in the country. That is a lot of tax regulations to keep up with. To illustrate how complicated these manners can be, here’s an example of a tax policy in Illinois; a Snickers bar is taxed differently than Twix bar because products with flour are not classified as candy. How is a small out-of-state business going to know that? Well, they better know it, or they may risk being audited. Luckily there are automated taxing systems and accountants that can help online companies comply with each of the necessary tax policies. Unfortunately, automated taxing systems and accountants are not cheap. Businesses may also have to incur extra costs to hire consultants to match up the automated taxing system with their inventories. If the Supreme Courts goal was to beat big businesses, then that is going to fail. Big businesses can afford these services, and they are most likely already paying state taxes in each state. Amazon is one of these big e-tailers that have already established a physical presence in many states and impose a sales tax accordingly. According to Richard Wolf of USA Today, “The top 100 retail sellers remit about 90 percent of the taxes owed.”. This ruling is not going to hurt big businesses. It is going to hurt small businesses. Small businesses are going to be less able to make these adjustments. Laurence Kotlikoff of Forbes states that this ruling could cause his personal business to be in serious Jeopardy. It would increase his tax compliance cost from about $50,000 to $150,000. We can’t expect the small businesses in the US to keep thriving under this system. I do not think that this ruling necessarily promotes American values. Small online businesses are going to be subject to ‘taxation without representation’. These online companies will have to collect and pay taxes to a state that they have no physical presence in. States where they have no voting power at all. At the end of the day, it comes down to what we value more at this point in time. More funding for state governments would be great, but is it really worth it if it causes small businesses to struggle? I know that the average joe like myself could certainly benefit from more government funding but protecting our nations small businesses must come first.

The Supreme Courts motives are understandable, but their logic is flawed. Online businesses do get an advantage for not having to impose sales taxes on purchases from a state in which they do not have a physical presence in. State governments are missing out on a healthy amount of funds that could ultimately benefit their communities. In my opinion, this ruling was timed very poorly. The taxation system is just too complicated between states. Because of the vast number of variances between states, businesses will have to make very costly adjustments that prohibits healthy growth and could put their existence in question. This was not the time to make this ruling. The direction that we need to go in is simplification. States must work to simplify tax policies to make this a more affordable transition for small businesses. South Dakota has an interesting policy that will potentially address all of the issues I previously mentioned. South Dakotas law forces companies that make over $100,000 in revenue in state or over 200 transactions in state to charge a sales tax to consumers. This law specifically targets bigger businesses that can afford the costly adjustments. It also does not damage small businesses, provides more funding towards their state, and promotes local business. The blame doesn’t all fall into the lap of law makers. Consumers are taking advantage of the leniency of e-commerce tax policies. Our negligence of paying sales taxes are a partial reason why the Supreme Court made this decision. Our state governments are losing out on billions of dollars because we choose not to pay our state sales taxes. I keep mentioning that distant online businesses have an unfair advantage over local brick-and-mortar businesses. This advantage was created by the consumers who choose to not report their transactions and pay the required tax. Since that trend is likely to continue, all hope is left with the state government officials. Without simplification of taxation policies, the Supreme Court’s ruling is destined to have severe repercussions.

 

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One Comment to “Supreme Court Sales Tax Ruling Could Bury Online Small Businesses”

  1. Wow, there was a lot of information given here that I didn’t know before, like how consumers were expected to pay state taxes, if I understand this correctly, separately from buying a product. I don’t really now how to feel about this honestly, only because I’ve never bought anything online from a small business. It really sounds like there’s a problem with the variety of sales taxes differing among states rather then paying taxes for brick-and-mortar or not. I don’t really thing the suprema court cares if this ruling comes at a bad time, because it would seem to me that the more time goes on, the worse the timing would be. Cool article!

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