This Supreme Court Case Could Change Online Shopping Overnight

The Supreme Court is considering whether to strike down the "physical presence" standard required for collecting state and local sales tax on online purchases.

Online commerce as we know it could soon radically change.

In a case it recently heard, the Supreme Court could eliminate the current requirement that a business have some physical connection with a state before the state can tax the business. If that were to happen, consumers would pay more for goods ordered online, small businesses and entrepreneurs offering services and products online would disappear, and people would have fewer options from which to purchase items.

The Case of the Commerce Clause

The Framers of the Constitution included the Commerce Clause, which gave Congress alone the authority to regulate commerce between the states and to solve interstate trade wars that arose during the Articles of Confederation.

When the Articles of Confederation governed the country, states placed tariffs on goods that were either imported from other states or traveling through their borders. Such tariffs were an easy way for state legislatures to raise revenue without answering to voters.

If the company did not have a “physical presence” in the state, the state could not force retailers to collect sales tax.

The Framers, though, realized that tariffs impeded the flow of commerce, harming consumers by raising costs. The Commerce Clause in the Constitution created a “free trade zone” within each state, ensuring that a state could not tax a person or business that had no say in the political process.

The Supreme Court has shaped Congress’ and the states’ authority under the Commerce Clause throughout the years. As companies like Sears, Roebuck & Co., and others developed mail order catalogs, the court decided that a state could force retailers to collect sales tax if the company had a store, warehouse, office, or employee within the state’s borders.

If the company did not have a “physical presence” in the state—if the only contact with the state was through the mail or orders placed over the phone—the state could not force retailers to collect sales tax.

Greedy State Governments Could Change It All

States argue that they are losing significant tax revenues because online businesses don’t have to pay the same type of sales taxes that brick-and-mortar stores pay. But this is simply not true—all businesses play by the same rules.

Sales taxes are collected on all online sales by 17 of the top 18 online retailers, including Amazon, Walmart, Costco, and Best Buy.

States have enjoyed a 23 percent increase in sales tax revenues from 2011 to 2017. According to a recent report from the Government Accountability Office, “80 percent of the potential [sales tax] revenue” from online retailers is “already collectable” under existing laws.

Most of the top 100 e-retailers, including 9 of the top 10 (which represents the vast majority of the United States retail e-commerce market) have physical locations. In fact, sales taxes are collected on all online sales by 17 of the top 18 online retailers, including Amazon, Walmart, Costco, and Best Buy.

The online marketplace trend is moving toward physical presence. Amazon, while primarily an online retailer, has obtained a physical presence in most states both by building warehouses and data centers and by purchasing the grocery chain Whole Foods. Walmart and Best Buy already have stores in each state, while retailing online.

Since most of the major online retailers have a physical presence, it is necessary to ask, who doesn’t have a physical presence in most states? The answer is: the disruptor, the innovator, the small business, and the entrepreneur.

If the Supreme Court strikes down the physical presence standard, the vibrant online commerce environment will change overnight.

The internet is a wonderful economic tool. It provides individuals access to a national, or global, marketplace for little cost. All that a person need do is launch a website, which can cost a couple hundred dollars.

What small businesses do not have, though, is the money needed to comply with all 12,000-plus taxing jurisdictions in the United States. They do not have the money to hire attorneys or tax professionals to handle an audit from those taxing jurisdictions. They do not have the overhead needed to comply with overly complex and burdensome tax regimes that states will apply if given the chance.

If the Supreme Court agrees with South Dakota and strikes down the physical presence standard, the vibrant online commerce environment will change overnight. Small businesses and entrepreneurs who lack the money to comply with these 12,000 taxing jurisdictions will cease doing business on a national scale. They will limit their business to one or two states—or even worse, shut down entirely.

Reprinted from the Daily Signal.

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