Buying stuff online is an easy option that sometimes comes with an extra discount: no sales tax. That unfair advantage for web retailers was called out Thursday by the U.S. Supreme Court in a decision that should help level the playing field between bricks-and-mortar and internet-based sellers.
If you enjoyed the illicit thrill of avoiding the 6.25 percent Illinois sales tax on internet purchases of running shoes or steaks, you'll mourn the court's opinion in South Dakota v. Wayfair. But if you believe in fair competition or if, say, you work at a store and worry about losing your job, you'll likely agree with the result of the 5-4 ruling: Sales tax should be collected in web transactions just as it is on Main Street.
The court overturned a 1992 decision that had laid out stricter rules for collecting retail sales tax from out-of-state merchants. In that case, Quill v. North Dakota, the court said those merchants were required to collect sales tax only when they had a physical presence, such as a store, office or warehouse, in the state in which the customer resides. The Quill decision, based on an interpretation of the Constitution related to interstate commerce, gave a boost to mail-order firms, which would have struggled with the paperwork burdens of collecting and remitting sales taxes nationally.
A lot has changed since 1992. The internet arrived and web-based retailing took hold as an attractive alternative to the mall. (Remember your first Cyber Monday?) Last year, e-commerce sales totaled $450 billion, or about 13 percent of all retail activity. Yet there are many instances in which web merchants don't collect the tax. The situation varies, depending on the state, but in Illinois, Amazon and other internet-based sellers collect the sales tax while firms without a presence are not required to do so. That's unfair to the local pet supply store or jeweler, and the disparity will come to an end. "Remote sellers will no longer be using the tax code as an arbitrary competitive advantage," Rob Karr, president and CEO of the Illinois Retail Merchants Association, tells us.
The Supreme Court case arises from a decision by South Dakota to change its law to require all e-commerce sites to collect the sales tax, regardless of whether they have a physical presence. The law did carve out an exemption for small merchants -- those with fewer than 200 customers in the state annually or sales below $100,000.
South Dakota was worried about lost sales tax revenue. When a web retailer doesn't collect sales tax, the consumer is supposed to pay a use tax (surprise!), but the compliance rate is notoriously low (no surprise). The court gave South Dakota a victory, knocking aside the physical-presence rule as arbitrary and obsolete in the digital age. "Quill creates rather than resolves market distortions," wrote Justice Anthony Kennedy. In dissent, Chief Justice John Roberts said Congress should be making this decision, not the courts. But Congress has tried, and failed, to pass legislation.
What happens next? Illinois has on the books a provision identical to South Dakota's, so it should be able to move quickly to require sales tax in most online transactions. That will bring Springfield millions of dollars while closing a loophole that hurt Illinois retailers.
There's still an opening for Congress to consider tax legislation to simplify the collection process, but this decision is good for business at traditional stores without being unfair to online merchants. Local shopkeepers and web retailers should compete on price, selection, quality and convenience -- not on who can game sales taxes.