Moneybox

Jeff Bezos Will Lose Zero Sleep Over the Supreme Court’s Decision to End Tax-Free Online Shopping

WASHINGTON, DC - APRIL 17:  Attorney represents eBay Andrew Pincus speaks to members of the media in front of the U.S. Supreme Court April 17, 2018 in Washington, DC. The Supreme Court heard oral arguments today in South Dakota v. Wayfair, regarding whether states can collect sales taxes on purchases from out-of-state online retailers.  (Photo by Alex Wong/Getty Images)
Lawyers standing outside of the U.S. Supreme Court on April 17, after the Supreme Court heard oral arguments in South Dakota v. Wayfair.
Alex Wong/Getty Images

The Supreme Court dragged a bit of American tax law into the 21st century on Thursday, ruling that states could finally force all online retailers to collect sales taxes even if they lack a physical presence there.

The move should make it a little harder for shoppers to save money by buying stuff on the internet instead of in stores, and could potentially add billions of dollars to state budgets each year. What it probably won’t do is fundamentally change Americans’ shopping habits now that we’ve all gotten used to buying paper towels and underwear with one click online.

The court’s 5-to-4 decision overturned a decades-old precedent that had allowed online merchants to skirt state sales taxes ever since the early days of the commercial internet. In Quill Corp. v. North Dakota, a 1992 case involving mail-order catalogs, the court had ruled that retailers could only be required to collect sales taxes in states where they had a physical footprint, such as an office or warehouse. The holding gave an early, built-in price advantage to companies like eBay and Amazon over brick-and-mortar retailers, which spent years fruitlessly lobbying Capitol Hill to change the law. A bill managed to pass the Senate in 2013, but died in the House due to opposition from tax-averse Republicans.

In 2016, South Dakota passed its own internet sales tax legislation with the hope of convincing the justices to rethink their old ruling. On Thursday, the court obliged. Writing for a 5-to-4 majority, Justice Anthony Kennedy acknowledged that Quill had become deeply outdated thanks to growth of the internet, calling it a “judicially created tax shelter” that “puts both local businesses and many interstate businesses with physical presence at a competitive disadvantage relative to remote sellers.”

The decision isn’t going to make your online purchases more expensive overnight, since states still need to adjust their tax laws. Nor does it seem likely to send Americans flocking en masse back to empty shopping malls. The fact is that plenty of big players in online retail were already collecting sales tax on many, if not most, of their sales. Wayfair, one the defendants in Thursday’s case, predicted that the court’s decision wouldn’t make “any noticeable impact” on its business because it already collected sales taxes on 80 percent of its orders. Its stock ultimately fell just a little over 1.6 percent after the ruling, suggesting that shareholders hardly expect the company to wither.

Or take Amazon, whose stock only fell just over 1.1 percent. Contrary to what Donald Trump might have you believe, the company already collects sales taxes on all of the items it sells directly to customers. It’s had to do so, in many cases, because its vast network of fulfillment centers made Amazon subject to state sales tax jurisdiction under the court’s standard in Quill. For a long time, the company did refuse collect taxes on goods sold by merchants through its third-party platform, Amazon Marketplace. But even there, it’s started to give significant ground. Late last year, the company said it would start tacking sales tax onto marketplace orders in Washington, where state legislators passed a seemingly clever law designed to force Amazon’s hand (essentially, the bill required big online retailers to either collect taxes or send customers a bunch of irritating reminders to pay the money themselves). If this is the end of tax-free online retail as we’ve known it, Jeff Bezos probably feels fine.

Some companies could struggle a bit thanks to Thursday’s decision, of course. Investors seem especially concerned about eBay, which relies on an army of small-time sellers who were often exempt from having to collect sales tax under the court’s old framework, and which saw its stock drop 3 percent today. There’s a bit of irony in the company’s predicament. eBay lobbied fiercely to kill Congress’ online sales tax bill in 2013, which would have at least exempted businesses with less than $1 million in revenue from its requirements. (Amazon, it should be noted, supported the legislation). If Congress had stepped in and fixed the law then, the Supreme Court wouldn’t have had to hand down a judgment now.

Then again, it’s very possible this issue isn’t really settled yet. In his ruling, Kennedy vaguely suggests that there might be a legal argument for exempting small web businesses from collecting out-of-state sales tax, because doing so would be more burdensome for them than Wayfair or Amazon. eBay is already calling on Congress to pass some sort of legislation to clarify the law, now that the court has laid waste to its previous lobbying efforts. The court killed one weird, anachronistic bit of tax law today. It’s still not entirely clear what will replace it.