Racked is no longer publishing. Thank you to everyone who read our work over the years. The archives will remain available here; for new stories, head over to Vox.com, where our staff is covering consumer culture for The Goods by Vox. You can also see what we’re up to by signing up here.
Online shopping has its perks: infinite items to buy, product reviews to tell you what’s worth buying, and, of course, convenience. In many cases, these transactions also skip the sales tax. On Tuesday, though, the Supreme Court will hear a case that could slap a digital sales tax on online purchases at big sites like Etsy and eBay, and as well as smaller, independent online shops.
Today, the justices will start listening to both sides of the case of South Dakota v. Wayfair Inc. In what’s been dubbed the “tax case of the millennium” by the National Conference of State Legislatures, South Dakota is looking to repeal a 1992 decision from the case Quill v. North Dakota, which ruled that companies only had to collect sales tax in states where they are physically located. South Dakota is arguing that the state, along with many other states, has been robbed billions of dollars as a result of the decision.
This case, which the Supreme Court is expected to decide in June, is hugely important. If Quill is overturned, giant e-commerce companies might have to start collecting sales taxes on all purchases — meaning you might have to start paying more for all that online shopping you do. It also just so happens to be top of mind for the president, as Donald Trump blasted Amazon a few weeks ago on Twitter for its tax practices.
What’s the case?
During the ’60s, the Supreme Court decided only businesses with a physical presence, like a company’s headquarters or company-owned property, had to add sales tax to purchases, according to the Tax Foundation. This decision was further cemented by the Supreme Court case Quill v. North Dakota when the Court decided mail orders placed through companies out of state didn’t have to have added sales tax.
In the 26-year-old case, North Dakota’s tax commissioner tried to get Quill Corporation, an office supplies retailer, to pay taxes on its business in North Dakota. The state argued that since it had so many customers in the state, it should be considered a North Dakota company and pay local taxes.
But because Quill had no physical presence or any workers living in North Dakota, and was instead doing business through methods like out-of-state mail orders and phone orders, the Supreme Court ruled that the business could avoid the local taxes. Since then, businesses have relied on the case as a legal defense for not collecting taxes in states where they don’t have a physical presence.
Fast-forward two decades, and shopping is ruled not by mail-to-order catalogs but by the internet. Does a decision from 1992 still make sense when online shopping in the US hit $360 billion in 2016, according to Statista, and yielded as much as $107 billion during last year’s holiday season alone?
South Dakota argues it does not. In 2016, the state passed a law that required online retailers to charge its residents a sales tax when they shop online. Once the law was passed, South Dakota sued four sites — the discount retailer Overstock.com, the home goods site Wayfair, the tech destination Newegg, and the industrial equipment supplier Systemax — for not complying.
The lower court struck down the law because it violated the 1992 Quill decision. The Supreme Court is now hearing the state battle against Wayfair.
Both Amazon and Walmart charge a sales tax in the 45 states that have a statewide sales tax even though they don’t legally have to. But many other online stores don’t collect taxes because of the Quill case — including third-party businesses selling through Amazon Marketplace, which is responsible for half of Amazon’s sales, or the third-party vendors selling their home goods on Wayfair.
South Dakota believes it loses almost $50 million annually because it’s not collecting online sales tax, according to Reuters. And its calculation is pretty low — a 2012 study from the University of Tennessee found that internet sales were making states lose about $23 billion every year.
Why does this matter for shopping?
It’s not as if there are no online retailers that charge digital sales tax. E-commerce giants like Amazon and Walmart voluntarily charge sales taxes for digital sales they make directly (as opposed to third-party sellers). Some department stores like Macy’s and Nordstrom also charge tax to customers who live in states where the company has a physical location, like warehouses or stores.
But businesses with no physical location aren’t required to charge sales tax beyond the state they inhabit. This is why small online boutiques and independent sellers on Etsy don’t currently have to charge sales tax. For giant companies staffed with lawyers and accountants, charging sales tax wouldn’t be such a big lift. Smaller retailers, on the other hand, could wade into complicated tax territory if they have to start charging sales tax for shoppers in every state.
South Dakota is backed by 35 states, which filed briefs in support of the state trying to implement online retailers to charge residents a sales tax. Some small brick-and-mortar businesses that don’t rely on the web for the majority of their sales, like local bookstores and mall owners, have also filed briefs voicing their support for the measure.
“Under Quill, if a customer purchases a book from a bricks-and-mortar bookstore in a state with a sales tax, the bookstore is legally obligated to collect the tax. But if a customer purchases the same book from an online bookstore without a physical presence in that state, the online bookstore cannot be subjected to the same legal obligation — which means, in practical terms, that the customer will not pay sales tax,” the American Booksellers Association wrote in a brief. “This artificial imbalance creates a powerful incentive for customers to buy books online rather than from their local bookstore, and as such, causes significant competitive harm to those bookstores.”
Last year, according to Bloomberg, 49 percent of retail sales growth came from online shopping, while in-store foot traffic is declining. Business owners feel particularly incensed about “showrooming,” where customers go into stores to browse and then buy the product online at a cheaper rate, without the sales tax, one business owner recently told Reuters.
In a press release, the National Retail Federation wrote that the “current tax system favors online retailers over brick-and-mortar businesses, and undermines fair and open competition in the marketplace.”
Those opposed to reversing the decision argue that starting to charge sales taxes on a state level would open a can of worms, as local taxes could get extremely complicated. In its challenge, Wayfair says having businesses navigate each state’s laws would be a herculean task, referring to the small, independent businesses that don’t have the manpower to start deciphering tedious tax codes.
“It doesn’t seem fair to me to have to pay taxes in an area I’ve never even visited before,” one eBay business owner told the Washington Post. “If we had to start charging sales tax, it would put us out of the market.”
Wayfair also argues that back tax could make things even worse. While South Dakota says it is only looking to collect sales tax on future sales, other states could decide to start charging for previous years they didn’t collect taxes. That could ruin small businesses.
Wayfair tells Racked it already collects taxes on 80 percent of its sales and that it wants to level the playing field of online and brick-and-mortar business, so long as the process is clear.
“In regard to the current Supreme Court case, Wayfair firmly believes a legislative solution that creates certainty and addresses the concerns of all constituencies is the best way to move forward,” it said in a statement. “Win or lose at the Supreme Court, we will continue to advocate for a legislative solution and a level playing field where all retailers collect and remit sales tax on the same basis.”
How is President Trump involved?
While this case has important ramifications for both shoppers and businesses, it also has political implications. President Trump has been in a public, ongoing feud with Amazon and its tax practices. He is reportedly “obsessed with Amazon” and wants to “clip CEO Jeff Bezos’ wings.” Last year Trump tweeted that the company was doing “great damage” to tax-paying retailers.
A few weeks ago, he accused Amazon of paying “little or no taxes to state & local governments.” While this isn’t completely correct — the company has been collecting taxes on items it sells directly since 2017 — it is true that people who sell through Amazon Marketplace don’t collect local sales tax.
The Trump administration, naturally, wants the Supreme Court to toss the Quill decision and wrote a legal brief on March 5 advocating that it do so.
“The court should resolve this case by making clear that an out-of-state internet retailer’s virtual presence within a state is a sufficient ground for requiring the retailer to collect sales or use taxes owed by its in-state customers,” Solicitor General Noel Francisco wrote.
If the Quill decision gets overturned, Amazon might have to charge sales tax on every purchase, even the ones coming out of its Marketplace — something Trump definitely wants to see. Wealthy friends of the president have reportedly been complaining to him about Amazon eating away at their businesses.
But the decision could also backfire for the president. Apparently, one online store that’s been enjoying the ruling of the Quill case includes the Trump Organization’s e-commerce site. According to the Wall Street Journal, TrumpStore.com, which sells Trump apparel, slippers, keychains, and golf accessories, only collects sales tax from two states.
Update: April 17th, 2018, 12:20 p.m.
This post has been updated to include a statement from Wayfair.