Will You Have to Pay More Sales Taxes on Your Online Purchases?

One thing’s for sure: Consumers who live in one of the five states without a sales tax won’t be affected by the Supreme Court’s ruling.

(Image credit: 2018 Getty Images)

Today’s ruling by the Supreme Court has many consumers wondering: Am I going to start paying more in taxes to shop online? But you already do, to a certain extent. Amazon, Walmart, Target, Costco, Sears and some others already collect state sales taxes on online orders from buyers in states that impose sales taxes.

However, Amazon only collects sales taxes on its third-party sellers for two states, Washington and Pennsylvania. And many other sellers that do not have a physical distribution network in a particular state, such as Overstock.com, do not collect either. Such e-commerce businesses generally have not been required to collect sales taxes since the 1992 Supreme Court case, Quill v. North Dakota, which held that only those businesses with a physical presence in a state had to collect sales taxes from customers in that state. That physical presence standard was just overturned by the Supreme Court in the case South Dakota v. Wayfair, by a 5-4 decision.

The Court’s majority decided that the landscape has changed since 1992, with e-commerce now taking a far larger share of total retail sales. It ruled that economic activity in a state is a better measure of relevance for purposes of taxation than physical presence.

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But note that the Court only says that the South Dakota law is OK for South Dakota, without defining what “OK” means for all the other states. Under the S.D. law, sellers that make more than $100,000 in yearly sales or 200 transactions in that state are required to collect sales tax from S.D. buyers. Other states looking to tax internet sales will also likely have to exclude small businesses in order to withstand legal scrutiny. The S.D. law is also not retroactive.

Still, the ruling clears the way for other states to enact similar laws requiring retailers to collect applicable sales tax on online purchases made by residents of the state. Many states are bound to take advantage of the green light the Supreme Court has given them, which means consumers will eventually end up having to pay sales tax on more of the things they buy online. Note that consumers who live in one of the five states without a sales tax…Alaska, Del., Mont., N.H. and Ore…won’t be affected by the Supreme Court’s ruling.

Congress could be pressed to eventually step in and set a national standard exempting internet sales for small sellers. Congress would be motivated to appear as the good guys by superseding the myriad of burdensome state laws. It also helps that both Amazon CEO Jeff Bezos and President Trump favor a national standard instead of a patchwork.

Whatever lawmakers do, don’t assume that the imposition of online sales taxes will sink e-commerce. Many shoppers shop online to see large selections, get fast delivery and find low prices. Online prices are still likely to be lower than in-store, simply because online sellers have lower infrastructure and labor costs.

David Payne
Staff Economist, The Kiplinger Letter

David is both staff economist and reporter for The Kiplinger Letter, overseeing Kiplinger forecasts for the U.S. and world economies. Previously, he was senior principal economist in the Center for Forecasting and Modeling at IHS/GlobalInsight, and an economist in the Chief Economist's Office of the U.S. Department of Commerce. David has co-written weekly reports on economic conditions since 1992, and has forecasted GDP and its components since 1995, beating the Blue Chip Indicators forecasts two-thirds of the time. David is a Certified Business Economist as recognized by the National Association for Business Economics. He has two master's degrees and is ABD in economics from the University of North Carolina at Chapel Hill.