Supreme Court Moves to Tax Online Sales

June 25, 2018  |  By Sudheer Chava and Holly Dragoo

A Supreme Court ruling of 5-4 overturned a decades-old law that had allowed businesses to avoid collecting sales tax from online customers if the retailer had no physical presence in their state. Now, any state can require internet retailers to collect sales taxes even if they have no physical store in the area. The original lawsuit was brought against retailers Wayfair, Overstock, and Newegg by the state of South Dakota, leveraging a 2016 state rule that required out-of-state businesses with more than $100,000 in sales to collect sales tax from residents online. Brick-and-mortar retailers claimed that if online retailers weren't required to collect sales tax in all states for all transactions, they would continue to have an unfair price advantage. As some states have been flirting with bankruptcy, this verdict is poised to offer millions of dollars in new revenue.

Professor Sudheer Chava: "The ruling, on the one hand, may help brick-and-mortar businesses to compete with e-commerce firms on a level playing field. But on the other hand, it may create an entry barrier for small and emerging players in the online retail landscape.

In a recent study (by Georgia Tech's Scheller College of Business: S. Chava, A. Oettl, M. Singh, L. Zeng), we analyzed the impact of the staggered rollout of a major e-commerce retailer’s warehouses on the income and employment of workers at geographically proximate brick-and-mortar retail stores. Using an employer-employee payroll dataset for approximately 2.6 million retail workers, we found that the establishment of an e-commerce warehouse in a county hurts the income of retail workers in that county and neighboring counties within 100 miles. The wages of hourly workers, especially part-time hourly workers, decrease significantly. Using sales and employment data for 3.2 million stores, we found that retail stores in counties around an e-commerce retailer’s warehouses experience a reduction in sales and their number of employees. Overall, our results highlight the extent to which a dramatic increase in e-commerce retail sales can have adverse consequences for workers at traditional brick-and-mortar stores.

This ruling may help physical stores, both small and large, who were previously at a disadvantage relative to online retailers, and thereby, some of the workers of these retailers. But, smaller online vendors without the structure or capacity to build a tax collection apparatus in 45 different states, may also face challenges.  As states start requiring state sales tax collection for out-of-state retailers, the complexity of new regulations, legislation and enforcement are going to pose significant compliance challenges for small online retailers."


IISP Analyst Holly Dragoo: "To date, online streaming services like Netflix and Hulu have sporadically been subject to taxation in different states; it was only a matter of time before this issue graduated towards other e-commerce transactions with consistency. As is the case with many Internet-related Supreme Court cases (i.e. Microsoft vs. Ireland leading towards the CLOUD Act of 2018, or Zeran vs. AOL Inc. in 1998 leading to the Communications Decency Act amendments), it’s probably fair to say that legislation affecting both online streaming services and other goods will emerge in the next couple years to synchronize the different policies and formulate a true federal standard. Until then, it is up to states to, one-by-one, begin collecting sales tax for online purchases should they so choose."


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