Right now when you buy something from certain websites, you might do a little dance when you see a big fat zero on the line for sales tax. Up until last week, retailers were only required to collect state sales tax if they had a physical presence in the buyer’s state (the rule dates back to a 1992 law when catalogs were all the rage).
But just because the online retailer didn’t collect the sales tax, it didn’t simply disappear. In many states, they actually then placed that burden on the consumer. That’s right, if you bought something online and did not see a state sales tax added on to your purchase, you technically should have reported what you bought to your state tax agency and paid the tax directly to them. You haven’t been doing that? You’re not alone.
A 2015 survey by the International Council of Shopping Centers found 62 percent of registered voters didn’t know they needed to pay state sales tax from online purchases on their income taxes.
So looks like most of us have been stiffing our states when it comes to paying sales taxes for online purchases. The Supreme Court has now ruled that states can force online retailers to collect that tax. The ruling may not affect your pocketbook when it comes to the websites you shop most, though.
Home furnishings and decor website Wayfair released a statement saying it already charges sales tax on 80 percent of its orders. The statement said the company does not expect this change “to have any noticeable impact on our business.” Amazon made the move more than a year ago to collect sales tax from all states that have a sales tax (Alaska, Delaware, Montana, New Hampshire and Oregon do not). The Washington Post reported that 19 of the top 20 online retailers are already collecting sales tax.
If the largest online retailers are already charging state sales tax, what’s the big deal about the new rules? Plenty of retailers still do not collect the tax and consumers aren’t keeping track to pay it on their income taxes. So states are missing out on a lot of revenue. A November report from the General Accounting Office shows states stand to gain billions of dollars in potential revenue by requiring companies to collect online sales tax. Vermont is on the low end, where additional earnings would be between $16 million and $23 million per year. And on the high end, California could collect additional state sales taxes between $1 billion and $1.7 billion per year.
Chief Justice John Roberts wrote the dissenting opinion in this case, South Dakota v. Wayfair, Inc., saying the burden will fall disproportionately on small businesses. He wrote, “People starting a business selling their embroidered pillowcases or carved decoys can offer their wares throughout the country — but probably not if they have to figure out the tax due on every sale.”
But a statement from the National Retail Federation said retailers have been waiting for this day for a long time. “This ruling clears the way for a fair and level playing field where all retailers compete under the same sales tax rules whether they sell merchandise online, in-store or both,” said Matthew Shay, the group's president and CEO.
Whether the state sales tax now required for online retailers will make consumers run back to brick and mortar stores remains to be seen. But on CNBC, Sucharita Kodali, a Forrester retail analyst, said their latest survey shows 10 percent of consumers say they will now go back to shopping at physical stores.