A recap of what’s at stake for online retailers when the Supreme Court hears the sales tax case tomorrow. The court will hear arguments on if the physical-presence rule should still stand as the determining factor if retailers collect sales tax in a state.

April 17, 2018 could be the day that transforms the way online retailers operate when the U.S. Supreme Court will hear the case South Dakota v. Wayfair Inc., et al. The court is expected to announce its decision in June.

The case could overturn the 26-year-old precedent, established in Quill Corp. v. North Dakota, when the court ruled that Quill, a catalog retailer, did not have to collect sales tax in North Dakota because it had no physical presence in the state.

South Dakota aims to overturn that precedent to force retailers to collect sales tax on online purchases regardless of whether they have a physical presence—such as a store or distribution center—in the state.

The state argues that the current precedent harms state treasuries and store-based retailers. The web-only merchants Wayfair, Overstock and Newegg counter that collecting sales tax would be too complicated for small and medium-sized retailers that don’t have a system to calculate how to comply with the nation’s 12,000 tax jurisdictions.

 

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The internet is not a tool reserved for the biggest companies.
Brian Bieron, senior director of government relations at eBay

Several retail businesses, such as Flipper LLC, which lists goods for sale on Amazon.com Inc.’s marketplace, and online marketplaces eBay Inc. and Etsy Inc., have filed briefs urging the court to uphold Quill. EBay filed its brief along with 51 of its marketplace merchants to ensure the court considers not only how large web-based retailers sell online, but also how small businesses use the internet, Brian Bieron, senior director of government relations at eBay told Internet Retailer.

“We hope that [the court] understands how important e-commerce is to the growth opportunities of small businesses and to entrepreneurs throughout the country,” Bieron says.

Wayfair, Overstock and Newegg are large online retailers, each generating annual revenue of more than $1.8 billion, according to Internet Retailer data. That sets them apart from many small eBay marketplace sellers, Bieron says.

“The internet is not a tool reserved for the biggest companies,” Bieron says.

Because eBay does not sell any of its own goods, it does not collect sales tax for the sale of products on its platform. Instead, it is optional for a marketplace merchant to tell eBay in which states it has a physical presence, and eBay will calculate the sales tax when a consumer from one of those states makes a purchase.

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Amazon operates differently, as about half of its sales are from products it sells, and half of its product sales are from marketplace merchants. Amazon collects sales tax in all states that have sales tax on products it sells itself. Alaska, Delaware, Oregon, Montana and New Hampshire do not collect sales tax. However, like eBay, Amazon in its marketplace business leaves it up to marketplaces sellers to collect sales tax on their goods. A marketplace seller provides Amazon with its state tax ID for the states where the seller wants to collect sales tax. Amazon charges merchants 2.9% of the sales tax revenue collected as a collection fee, says James Thomson, partner at consultancy firm Buy Box Experts. Many marketplace sellers do not collect sales tax.

More than 40 states filed a brief in support of South Dakota; however, Montana, Washington and New Hampshire filed briefs to support upholding Quill.

In its brief, South Dakota argues that a retailer having a physical presence in the state is “arbitrary in assessing both a seller’s connection to a State and its ability to shoulder the burdens of sales-tax collection.”

State and local governments could have collected up to $13 billion more in 2017 if they’d been allowed to require sales-tax payments from online merchants and other remote sellers, according to a report from the Government Accountability Office, Congress’s non-partisan audit and research agency. Other estimates are even higher.

72% of retailers said online merchants should not be required to collect sales tax in states in which they don’t have a physical presence, according to an Internet Retailer survey with Toluna of 39 retailers in January. 17% of respondents said merchants should have to collect sales tax regardless of whether they have a physical presence in a state and 11% didn’t know. What’s more, 69% of retailers said that a law requiring them to collect sale tax from consumers nationwide would have a “very negative impact” on their business and 17% said such a law would have a “slightly negative impact.”

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From a shopper’s perspective, 39% of consumers said they actively have looked for an online retailer that does not charge sales tax in an effort to save money on an online purchase, according to an Internet Retailer survey via SurveyMonkey of 500 consumers in January. Plus, 36% of consumers say they would shop online less frequently if all retailers were charging a sales tax for an online purchase.

Wayfair is No. 16 in the Internet Retailer 2017 Top 500, Amazon is No. 1, Newegg is No. 21, Etsy is No. 22 and Overstock.com Inc. is No. 30. EBay is No. 4 in the Online Marketplaces database.