Sales tax ruling upends online shopping
Supreme Court’s decision to allow states to levy charges on web-based purchases hailed as boon to brick-and-mortar stores
The U.S. Supreme Court ruling on Thursday allowing states to collect sales tax on most internet purchases is a boon for brick-andmortar retailers and the government, but a setback for smaller ecommerce businesses and consumers, experts said.
The 5-4 decision in South Dakota v. Wayfair Inc. overturned a decades-old Supreme Court precedent that barred states from collecting sales tax on goods sold online by companies that do not have a physical presence in the state. The lack of a broad online sales tax has fueled the rise of e-commerce, which today represents nearly one in every 10 retail transactions nationally.
E-commerce giants, such as Amazon, already collect online sales taxes in Texas, because they operate fulfillment centers in the state. However, for retailers such as Wayfair and Newegg that sell big-ticket items, the new ruling represents the loss of a major incentive for customers to buy online. In the Houston area, state and local sales taxes total 8.25 percent.
“If you’re buying big furniture or electronics like a stereo online, an 8.25 percent sales tax will be a big sticker shock,” said Venkatesh Shankar, director of research at Texas A&M University’s Center for Retailing Studies. “This could hurt online retailers, because they won’t be as competitive.”
Smaller online retailers, such as mom-and-pop shops on Etsy.com, potentially face the added burden of collecting sales taxes anywhere their goods are sold,
said Tracy Watts, senior state and local tax consultant in the Houston office of RSM U.S., one of the largest tax auditing firms nationally.
“This will create administrative burdens on small businesses,” Watts said. “And once they start collecting and filing sales taxes, they open themselves up to audits by the state.”
Adriana Soto and her husband, David Munoz, operate Adriana Soto Jewelry on Etsy, an online platform for artists to sell their craft. The decade-old company sold 2,300 pieces of handmade gemstone jewelry last year, with the typical sale ranging between $24 and $30.
The Bellaire couple collects sales taxes through Etsy for Texas and Pennsylvania, but not for other states. They expect they may have to remit taxes for more states after Thursday’s Supreme Court decision.
“There’s going to be a huge learning curve, more paper paperwork and more time involved,” Munoz said. “We’re not excited about it, but it’s something we’ve seen coming for a long time now.”
Most states, following South Dakota’s model, likely will carve out protections for smaller businesses, said Brandon Rottinghaus, a political science professor at the University of Houston. The state comptroller’s office is studying the case to determine if applying the sales tax to more online retailers would require new laws or policy changes, a spokesman said.
Brick-and-mortar retailers, many of which have struggled financially amid mounting pressure from ecommerce competitors, have long complained about the lack of sales tax on online shopping. They argued it puts them at a disadvantage and creates an unfair marketplace.
The new ruling means states now have the power to mandate that e-commerce retailers remit sales taxes on online goods, even if the company does not have any storefronts, warehouses and distribution centers in the state.
“Not having to charge sales tax has long been a big advantage to online retailers,” said Joshua Orr, founder of Streamline, a Houston-based retail consulting firm. “This ruling evens the playing field between brick-and-mortar and online retailers.”
While consumers may feel the pinch from additional sales taxes, Orr said it likely won’t do much to stem the growing popularity of online shopping. That’s because e-commerce’s competitive advantage over brick-and-mortar has largely shifted from lower prices to convenience, he said.
Houston stands to gain heavily from the ruling. It receives the most sales tax of any city in the Lone Star State — nearly $343 million since the start of the year, a 7.5 percent increase from the same period last year.
Texas, which doesn’t have a state income tax and relies heavily on sales taxes, has long argued that it misses out on hundreds of millions of dollars in state sales tax annually.
The new ruling, if applied to Texas, is estimated to add $800 million to state coffers and $200 million to local coffers, according to a 2014 report by the Texas Comptroller of Public Accounts.
Given Texas’ population increase, the online sales tax revenue is probably north of $1.5 billion today, Rottinghaus said.
That’s enough money to double the state allocation for border security, or address budget deficits in public education, he added.
“A billion dollars is a tremendous amount of money, even in a state the size of Texas,” Rottinghaus said. “This money will plug a lot of holes, especially in public education.”