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Supreme Court upholds tax fairness for retailers

Retailers across the nation have won a hard-earned victory with the U.S. Supreme Court’s landmark ruling on sales tax fairness.

After a 5-4 vote last month to restore free market competition, the court announced a ruling that allows states to require remote retailers to collect and remit sales taxes. For 26 years prior to the ruling, an earlier High Court ruling concluded that states could only collect those taxes from sellers with a physical presence in their state. The explosion of worldwide online sales in the intervening years resulted in a distinct price advantage for online sellers who chose to forgo collection of owed state sales taxes if their customers were located in another state.

For many consumers, the issue may be a bit complicated to grasp, but the outcome is a clear win for traditional brick-and-mortar retailers and states that were unable to collect all the sales taxes that were due to them. Now, traditional and online retailers can compete in a fairer marketplace.

For as much as 20 years, advocates including the Washington Retail Association urged Congress to address the tax inequity that had been making it harder for traditional retailers to compete as customers warmed up to online shopping. Bills to remedy the situation would continue to be introduced in Congress only to stall in a House committee chaired by a Congressman who feared that voters would perceive any reform as a tax increase.

In fact, the taxes that now can be collected by states have been owed all along.

The issue found its way back to the Supreme Court due to a lawsuit by the State of South Dakota, which had passed a law requiring certain out-of-state online sellers to collect and return its sales taxes. The state sued Wayfair, and Newegg, which had no buildings or employees in the state, for refusing to collect its taxes.

Justice Anthony Kennedy, writing for the court’s majority, nicely summarized the sentiments of traditional retail advocates. He found the 1992 Supreme Court ruling to be outdated and a distortion of the current retail marketplace that unfairly shifts the tax burden to the law-abiding businesses that were collecting and remitting legal sales taxes. Twenty-six years ago, Kennedy wrote, the Supreme Court “did not have before it the present realities of the interstate marketplace, where the Internet’s prevalence and power have changed the dynamics of the national economy.”

The ruling is eventually expected to introduce hundreds of millions of dollars of new revenue into state coffers across the nation. Considering that Washington State is spending from a $43.7 billion two-year budget, the ruling will create healthy new revenues for Washington. Industry estimates are that the state will see between $1 to $1.5 billion a year in additional revenues.

While the ruling sets the stage for fairer competition between traditional stores and online sellers, it does not completely clear up the future.

Individual states can now go about figuring out how to require sales tax collection and remittance by out-of-state sellers.  Their laws may very well be distinct and different from each other. Could there be appeals to Congress to impose uniform, nationwide rules for sales tax collection? That remains to be seen. It also will take time before states can accurately estimate how much new revenue they will receive.

Despite lingering questions, though, the ruling has a couple good things going for it.

At long last, it changes the competitive rules in a way that accurately reflects the changes technology has introduced into the marketplace. In doing so, it removes the competitive price advantage that online sellers enjoyed at the expense of brick-and-mortar retailers.

Best of all, the ruling promises to revitalize stores that had been losing market share to sellers who enjoyed a price advantage for the same items. This can only stabilize traditional stores and the economy in the process.

Renée Sunde is President/CEO of the Washington Retail Association.

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