Supreme Court makes ruling on online sales tax: Auburn professor weighs in on impact

Kimberly Key is a professor of accounting in the School of Accountancy in the Raymond J. Harbert College of Business. Key’s research interests are primarily in the areas of earnings management, the effect of taxes on asset prices and state taxation.  She offers the below answers that address the U.S. Supreme Court’s recent ruling on online sales tax.  

1. How will the Supreme Court’s decision impact local businesses who were already charging sales tax?

They will continue business as usual, but they are likely hoping that a more even playing field for sales tax will bring more local customers, and therefore more sales, to their businesses. Some of these effects could be short-term as customers become used to paying more sales tax for purchases from out-of-state sellers and base their buying decisions on other important factors.

2. How will the decision impact online retailers who may be forced to collect sales tax from all states?

The Supreme Court ruled on South Dakota’s sales tax law. There will be a transition period as legislators in other states decide on the exact rules they want to implement. For example, the South Dakota law applies only to sellers that annually deliver more than $100,000 of goods or engage in more than 200 separate transactions to deliver goods. Online retailers and their professional advisors will monitor legislation and implement procedures and information systems to properly collect and remit sales tax.
Some large retailers already participate in voluntary, simplified and streamlined collection processes, so they will not be affected directly. They might even be pleased to see the tax collection obligation widening to more sellers. Online retailers who are not yet collecting tax are probably concerned that the extra cost on customers could decrease their sales. All out-of-state sellers will want the tax collection and remission process to run smoothly and not to cost too much to administer. (The dissenting opinion highlights the administrative burden among other issues.)
On a positive note, when the Supreme Court rejected the physical presence standard for having to collect sales tax, they noted that the standard could have been causing market distortions. Businesses might have avoided certain in-state activities to avoid creating physical presence, and thus, the sales tax collection obligation. Businesses can now make decisions like in-state employee activity and warehouse locations without getting their tax departments or advisors involved.

3. Will the burden be heaviest on smaller online businesses?

The Supreme Court mentioned the possible burden on smaller businesses, and their decision points out that there are ways to seek relief from tax collection systems that are a burden. Small business advocates can be expected to monitor developments and provide input as state legislators draft new laws. Pursuing matters in the courts is always a future possibility too.
The burden will be eased if states exempt smaller online businesses from the sales tax collection obligation like South Dakota did.

4. What impact will this have on consumers?

I believe online shoppers might grumble a bit and maybe change (or say they will change) some of their shopping behavior, but overall I don’t think the actual dollar mount of sales tax savings has been the main motivation to online shopping. There might have been something intrinsically satisfying about not paying sales tax, but the convenience of online shopping and the attractiveness of free shipping remain. Discounts have also become prevalent in shopping decisions.

5. What do you project the long-range economic impact to be?

There is a lot of money collectively that will now be paid in tax, but it is spread across a lot of people. Overall, I do not expect much long-range economic impact from sales tax issues. The consumer shopping experience will continue to evolve, and I believe people are more interested in things like technological innovations than sales tax.
(The opinion of the four dissenters in the case expresses concern that changing the sales tax collection has the potential to disrupt the development of a critical segment of the economy. They believe Congress rather than the Court should act on this economic policy.)

6. What about states who will now benefit from increased tax revenue – is there a way to predict how much tax revenue might increase?

The Supreme Court decision cites estimates ranging from $8 to $33 billion per year. State government officials will be pleased to see this increase in their coffers, but the amounts are difficult to predict, and it will take some time to pass laws and start collecting the tax on out-of-state sellers. State and local governments vary in their reliance on sales tax, so higher tax states should see relatively bigger increases.

7. What are the downfalls of this decision?

Businesses that must register and collect and remit sales tax in new states will consider it a downfall if states become more aggressive in their attempts to collect other taxes from out-of-state sellers. Once the businesses are registered in the state for sales tax collection, a Department of Revenue could start investigating if the business connections to the state are sufficient to subject the business to the corporate income tax, for example.

8. What would happen if online retailers decide to file lawsuits?

The Supreme Court decision today has settled this issue. Their Wayfair decision overturned the Supreme Court’s 1992 decision in a similar fact pattern. In fact, the Court said the earlier decision implementing a physical presence standard was unsound and incorrect. There could be some lawsuits by small businesses if those business owners and their advocates believe specific state laws are unduly burdensome.

9. Will this change online spending habits as consumers seek to shop online rather than in brick-and-mortar stores?

That’s the big question on people’s minds following this decision! Right now, the Wayfair decision seems like a boost for brick and mortar stores. We will have to wait and see.