Updated 5/30 at 8:30 a.m.
In 1992, North Dakota wanted Delaware-based Quill Corp to pay taxes on catalog sales to its residents. The Supreme Court said it didn’t have to since it didn’t have a physical presence in the state.
“Quill made sense In 1992, it doesn’t in 2018,” said George Kelemen, CEO of the Texas Retailers Association.
A lot has changed in 26 years, he said, which was two years before the first online sale in history.
Now, according to the Department of Commerce, more than 13 percent of all retail sales in the U.S. are online, at an estimated $450 billion.
"It could theoretically increase the sales tax base in every city across the state."
As a result, South Dakota passed a law to tax online sellers last year and now South Dakota vs. Wayfair is at the Supreme Court.
Ultimately, Kelemen says this is about fairness and the current system puts brick-and-mortar retailers at a disadvantage — “8.25 percent of a disadvantage, when it comes to competing with someone out of state.”
The biggest player in online sales, Amazon, collects and pays sales tax. Walmart, Target, and other big chains with massive online sales already pay because they have physical locations in those states.
In fact, the Government Accountability Office estimates that states collect about 80 percent of all online sales taxes.
But there’s an estimated $13 billion in possible taxes from websites that don’t currently pay like Wayfair, Overstock.com and NewEgg.
“It’s not a big- or small-city issue. It could theoretically increase the sales tax base in every city across the state,” said Bill Longley, legislative counsel at the Texas Municipal League.
Because Texas doesn’t have an income tax, general sales tax makes up more than half of state tax revenue and a lot of city revenues, as well.
In Texas: four-year old comptroller estimates show online sales could generate $800 million more for the state and $200 million for cities and localities.
For Kelemen and Longley, this is a no brainer. But, with between 10,000 and 12,000 taxing authorities across the country, what’s more complicated is how much it will cost for businesses to comply.
“As we get smaller and smaller, it’s likely that the costs as a percentage of their sales are rising,” said David Agrawal, assistant professor of public policy and economics at the University of Kentucky, who added, according to the studies he’s seen, the costs fall disproportionately on smaller businesses.
Changing the ruling on Quill Corp could crush the small businesses argues officials from Ebay, a company that has 420,000 Texan sellers who will be affected.
Brian Bieron, executive director of Global Public Policy for Ebay says the current system is fair. Small companies — like the sometimes single-person company selling on Ebay — shouldn’t have to learn the tax code for 10,000 jurisdictions.
“State sales taxes are far more complex than the states themselves would like to admit,” he said.
In other words, here in the Lone Star State, your deodorant is charged sales tax, but if your under arm protection has antiperspirant in it, there’s no sales tax.
If you buy a Snickers bar in Illinois, you will pay 5 percent more than if you had bought a Twix bar. Because the Twix has flour, it is taxed as food rather than candy.
After Quill, 23 states formed the Streamlined Sales Tax Project to find common ground on tax rates. They also recommend free software or inexpensive programs to help calculate what online businesses owe.
Critics of these software packages say it has many errors, and the streamlined states have a long way to go.
A decision in South Dakota v. Wayfair is expected to be handed down before the end of June. If overturned, Texas could start collecting sales taxes right away. But, Bieron said, there is going to be a lot of sorting out to do.
“If that gets overturned, what were really going to see is a lot of years of litigation and a lot of complication over who exactly is covered,” he said.
If it doesn’t get overturned, retail associations and Texas cities will push for state solutions, and Congress, which has already considered bills like the Marketplace Fairness Act, will be called on to act.
Texas Senator Ted Cruz joined three Senate colleagues arguing in an amicus brief that Congress alone should make the call on this, despite little consensus in the branch.
Congress has failed to act on implementing an online sales tax despite urging the Supreme Court to do so in other cases.
Paul Flahive can be reached at paul@tpr.org or on Twitter @paulflahive
CORRECTION: The headline has been updated to better reflect the amount of money Texas could receive. ... The spelling of the surname Kelemen has been updated throughout.
