The Supreme Court has ruled that different states can now compel all online retailers to collect tax from consumers. The Court’s decision in Wayfair vs South Dakota has seemingly excited President Donald Trump.
Initially, retailers that were without a physical presence in a state were not required to charge their consumers’ sales tax. This decision had been reached by a 1992 ruling which is now automatically overturned by the new ruling.
The decision seemed to make sense then. Before the era of internet, offline tax collection was burdensome and complex. Consumers did most of their shopping at brick-and-mortar stores. Additionally, the sales tax is levied by both the state and municipality.
1992 court decision effect
The 1992 decision has always caused problems since it created a price differential between those who bought from physical stores and those who bought online. Retail expert, Jan Kniffen, explained that the price difference currently stands at 8%. He argued that in the past, buyers who bought online would avoid paying the sales tax. However, he points out that nobody was too concerned then since the online trade was too small.
Kniffen explained that different states have been losing revenues as a result. He gave an example of someone buying something in New York through online and have it shipped to New Jersey. That person will not pay tax in New York and will not pay tax in New Jersey, even though he/she owes the latter the sales tax.
Buyers were supposed to pay taxes themselves but few did it. The Supreme Court found out that 96% of buyers from California did not pay.
A more rational tax system
Therefore, the recent Supreme Court decision will enable states to seal loophole and lead to a more rational tax system. Although people will miss out on the occasional deals, the move will be good for the public.
This ruling will not have a great effect on the big players as it will on the small online retailer.
The Washington Post had reported earlier that 19 out of the top 20 online retailers were already collecting sales tax. Amazon, Walmart, Target, and Apple were among those that were doing so.
The said online retailers finally started paying sales tax in the last state last year. Although, it was noted that third-party players on Amazon did not collect the sales tax.
Kniffen predicts that since Amazon already has technology and software in place, it stands to benefit from the ruling. He said that Amazon has the ability to do every zip code in America and figure it out. He feels that all the retailer has to do is sell the service to every online player.