Sales Tax Fairness

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Since the Supreme Court’s landmark ruling that online sellers can be required to collect sales tax, most states that have a sales tax have begun requiring collection. A number had passed legislation or adopted regulations in anticipation of the June 2018 ruling, while others did so shortly thereafter.

NRF has provided retailers with a guide to the details of the court’s ruling, and has worked with accounting firm Ernst and Young to provide a chart showing collection requirements.

The issue

Main Street retailers in the 45 states with a sales tax are required by law to collect tax on virtually all of their sales. The same has always applied to online merchants selling to customers in their own states. But with the growth of the internet, local stores have faced increasing competition from large out-of-state online sellers who easily undercut them on pricing because of low overhead and high volume. And for more than 25 years, a 1992 Supreme Court ruling gave online sellers an additional unfair price advantage by saying they could not be required to collect sales tax from customers in states where they did not have a physical presence. With as much as $25 billion in sales taxes going uncollected each year, the disparity threatened jobs provided by local retailers and became worse as more shopping moved online.

Why it matters to retailers 

small business owner

When online sellers are not required to collect sales tax, they are given an unfair price advantage over local bricks-and-mortar merchants. With sales tax amounting to 10 percent in some areas, Main Street retailers have seen increased evidence that their customers are buying online to avoid the tax.

The disparity in sales tax rules has undermined not only Main Street retailers but also the communities they support. The billions of dollars in lost sales tax is revenue badly needed by state and local governments to pay the salaries of essential workers such as police officers, firefighters, ambulance crews, and schoolteachers. Those public workers are among retailers’ customers, and when customers lose their jobs retailers lose sales.

Online sales tax policy also has implications for the broader economy. A study conducted by prominent economist Arthur Laffer estimates that requiring online sellers to collect the same as local stores could increase gross domestic product by more than $500 billion and create 1.5 million new jobs by 2022.

NRF advocates for sales tax fairness

NRF has been the retail industry’s leading supporter of sales tax fairness for close to 20 years, saying Congress or the courts should create a level playing field that would allow all sellers to compete under the same sales tax rules. NRF has worked closely with members of Congress, governors, state tax officials and state legislators while also raising awareness of the issue through the news media and among the public.

Retailers have been waiting for this day for more than two decades,” NRF President and CEO Matthew Shay said after last summer’s ruling. “The retail industry is changing, and the Supreme Court has acted correctly in recognizing that it’s time for outdated sales tax policies to change as well.”

The Supreme Court’s decision ended a quarter-century of unequal tax treatment. The ruling reversed the conclusion the court came to in 1992’s Quill Corp. v. North Dakota, which held that online sellers could be required to collect sales tax only in states where they had a physical presence such as a store, office or warehouse. That ruling left sales tax uncollected on most online sales and gave internet sellers an unfair price advantage over bricks-and-mortar merchants. (Consumers are legally required to report untaxed purchases and pay the sales tax as “use” tax but most are unaware of the requirement and compliance is low.)

US Supreme Court statue

“The physical presence rule of Quill is unsound and incorrect,” the court said in its 24-page opinion. “Quill creates rather than resolves market distortions.”

In overturning Quill, the court upheld a South Dakota law that requires online merchants with more than $100,000 in annual sales to state residents or 200 transactions with state residents to collect sales tax.

A key part of the court’s reasoning in 1992 was that there were more than 6,000 state and local sales tax jurisdictions across the country and that regulations were too complex for a seller to know how much to collect unless they were doing business locally. But NRF argued in a friend-of-the-court brief that the reasoning was no longer valid because a wide variety of software is now available to automatically collect the sales tax owed, much of it available free or at low cost. NRF also said the lack of collection was “inflicting extreme harm and unfairness” on local retailers.

The new 5-4 opinion was written by Justice Anthony Kennedy, who had said in 2015 that the Supreme Court made a mistake in 1992 by relying on a 1960s precedent that was out-of-date even then and invited opponents of the Quill ruling to bring a new case.