Sales Tax Goes Back to Court

I designed and built my first website in 1996 (yow!), a corporate information brochure hand-coded in HTML. The second or third version of it is still available on Archive.org, proudly proclaiming that it is best viewed with Netscape 2.0. The site looks tiny and strange now, but at the time everything we were doing felt like the Wild West, with unlimited possibility. Almost 25 years later, the web has calcified a bit; design is minimal to best comport with device variety, and content is built to please search engines and social media rather than the whims and fancies of crazy people experimenting with new toys.

That year, I recall our IT administrator walking into my office—back then, the IT guy was also the nascent web guy (they were mostly guys), who later became an army of sysadmin and devops folks—talking about a new website where you could buy books online. It seemed insane to us; web sites were a place where you could put a company brochure online, maybe post a job opening or a press release, but you’d never compete with book stores or record stores.

That website was Amazon.com, and it’s as ubiquitous as sunlight or acne now, depending on your views of capitalism and/or its discontents. Though Jeff Bezos might pointedly disagree, one of the primary reasons for Amazon’s early success was its ability to underprice brick and mortar competitors by avoiding charging sales tax to most of its customers. This was not an advantage unique to Amazon; a key court decision in 1992 relieved businesses without a “physical presence” in a state from the burden of collecting sales tax on purchases shipped there. But Amazon exploited it more successfully than anyone else and, through a combination of aggressive pricing, logistical foresight and patient investors, was able to build an e-commerce platform that has nearly taken over the western world.

State governments have been at war with Amazon and other online retailers for nearly two decades now. All those tax-free transactions not only represent a uneven playing field for local companies, who by law must charge sales tax, but also many billions of dollars in revenue that the states claim are owed to them. The laws vary, but here in Texas the state comptroller even provides a consumer “use tax” form for everyday citizens to fill out so that you can pay the legally mandated tax that an online retailer did not charge you for that Frozen Blu-Ray you ordered last year. That’s correct—in Texas, as a consumer you are legally obligated to report the amount of all out-of-state purchases that did not include state sales tax (businesses are also required to do this, but they are policed very closely). Better get out your checkbook and send the state of Texas $1.68 for that DVD.

Of course, consumers mostly ignore this, and a few years back the state finally beat Amazon into submission and it now collects sales tax on Texas transactions; they couldn’t have avoided it for long, as they have distribution centers all over the state now (thus giving them “nexus”, or physical presence, in the state). Indeed, Amazon itself now collects sales tax in all states that charge it, though its third-party sellers may do whatever they want. However, the general problem remains for most other online retailers, as does the lost revenue for the states.

And the states don’t make it easy for retailers; many states have complex sales tax jurisdictions with rates that can vary along seemingly arbitrary boundaries. For a business like ours that builds and maintains an e-commerce platform, the holy grail is called “rooftop” accuracy; that is, the tax rate is accurate down to the level of the actual building that an order is being shipped to. You can’t rely on ZIP codes, cities or counties in some cases, because a city tax add-on (e.g. one-tenth of a percent added for municipal transit) may overlap with a county rate in certain places and not others. It’s a big, hot mess, and there are numerous companies that do nothing other than provide a paid service to help retailers collect tax accurately.

For years, most of us in the e-commerce business thought that some kind of consensus would be reached where states could agree to a universal “internet” e-commerce tax, or that the U.S. congress would step in and impose a standard tax with the power granted under the commerce clause. But the federal effort has never really gotten off the ground, and numerous attempts by state governors to rally together and negotiate a standard method or rate have failed, which is not entirely surprising given that some states charge no sales tax at all. This is federalism at its best or worst, again depending on which corner you’re yelling from.

That all could change this year, as the Supreme Court has agreed to revisit the Quill v. North Dakota decision that put all this into motion in the first place. Three large online retailers – Overstock.com, Wayfair.com and Newegg.com (Amazon is notably absent) are opposing a 2016 South Dakota law requiring any business with more than $100,000 in sales in the state to pay a 4.5% tax on purchases.

Whether this will resolve the conflict once and for all is unknown; simply overturning Quill and upholding South Dakota’s new law might not resolve anything conclusively. And upholding Quill might not spur Congress to do anything at all; this is clearly not a hot-button issue for our legislators. It’s one of those conflicts where a good resolution would likely involve a little bit of bloodletting on every side, and it doesn’t seem like anyone has the stomach for that right now, which is probably why it landed (yet again) on the steps of a courthouse.

–Brent Buford