Battle over sales taxes on online purchases heads to Supreme Court

Should you pay sales tax on your online purchases?

Chances are good you already do, even though the law requires online retailers to collect the tax only in states where they have a physical presence.

Amazon and Walmart, two of the giants of online retailing, collect sales tax on all their sales in the 45 states that have a statewide sales tax.

But many other smaller retailers don't collect sales tax unless they have a physical presence in the state where the buyer lives, relying on a 26-year old Supreme Court decision that was related to catalog retailers. Many of the sales on Amazon's and Walmart's sites are actually done by smaller retailers using those sites as their platform. For example, Amazon says half of the sales on the site are by small and medium size retailers.

On Tuesday the Supreme Court is hearing arguments whether to overturn its 1992 decision when it hears a new case focused on online purchases, South Dakota vs. Wayfair.

A reversal could mean that all online retailers must collect sales tax everywhere. It's an issue that brick-and-mortar retailers insist will provide a level playing field with online competitors, and help to provide state and local governments with the tax revenue they deserve.

"The current tax system favors online retailers over brick-and-mortar businesses, and undermines fair and open competition in the marketplace," the National Retail Federation argues in a brief it filed in the case.

President Donald Trump has claimed Amazon doesn't collect sales taxes, even though the company does.

The Trump administration will join the oral argument in favor of online retailers being required to collect sales taxes everywhere.

Those fighting the change say that it would impose an undue burden on small retailers who would owe not just state sales taxes but local sales taxes that many states and counties also impose. Wayfair argues more than 16,000 different taxing units could demand sales tax collections.

South Dakota says it is looking to start collecting taxes only for future online sales, but But Wayfair's attorneys argue in court filings that many other states and local governments could demand years of back sales taxes, forcing retailers to go through costly audits of past sales and make back payments that could bankrupt some companies.

"South Dakota's choice to forego its remedy for back taxes in the event that the Court were to overrule [existing law] will not limit the retroactive application of such a ruling with respect to other state and local jurisdictions," said Wayfair's attorneys.

And while the issue is portrayed as one of fairness for small brick-and-mortar retailers that have to compete against online retailers, experts say those small retailers could be among the ones that get hurt.

Many small retailers depend on online sales. If they have to start complying with the complexities of collecting and remitting sales taxes nationwide, many could be forced to abandon that part of their business.

"Those smaller retailers are now starting to see an ability to compete with the big guys like Amazon and Walmart," said Sam Cinquegrani, CEO of ObjectWave, a digital strategy and services firm. "Now it might be something else that is going to take them back a step."

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