Small online businesses may bear the brunt of the Supreme Court’s recent decision to allow states to collect sales tax from online retailers, but how bad it’ll be, they don’t yet know.
The high court ruling released Thursday gives states the right to collect sales tax from online vendors, even if they don’t have a physical presence in that state, overturning a pre-internet court ruling called Quill that exempted online merchants from those collection duties.
In the 5-4 decision, Justice Anthony Kennedy said the internet has completely changed the way people buy and sell goods. “When it decided Quill, the court could not have envisioned a world in which the world’s largest retailer would be a remote seller,” he wrote. “The internet’s prevalence and power have changed the dynamics of the national economy.”
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Amazon’s AMZN, -0.84% shares were down Thursday immediately after the decision. This ruling, however, will likely change the dynamics of small online businesses too. It’s not yet clear how so. The Supreme Court’s decision allows states to choose how they collect tax from online sellers, and how aggressively.
Without such revenue, however, states face budget deficits and may be forced to cut publicly-funded programs or seek money from other sources.
South Dakota, for example, requires online retailers to make $100,000 or more in sales in the state before paying sales tax, which would rule out a lot of small retailers. But Washington state has a specific provision for marketplace vendors and the platforms they sell on if they earn $10,000 or more in retail sales.
Online retailers that host small businesses, like eBay EBAY, +0.21% and Etsy, ETSY, -0.96% would be responsible for collecting the sales tax, said John Buhl, spokesman for the Tax Foundation, a think tank based in Washington, D.C. Small businesses selling goods on these sites will charge their customers any additional sales tax. Sellers may also see increased administrative costs as they manage this new sales tax regime.
These internet retailers are now looking to Congress to standardize the ways in which they must collect and pay sales tax. “Today’s ruling is limited to large online retailers and confirms that small businesses are clearly viewed differently by the court,” eBay said in a statement to MarketWatch. “Now is the time for Congress to provide clear tax rules with a strong small business exemption.”
Etsy also said this ruling opens the door for Congress to act. “We urge Congress to thoughtfully consider today’s decision and to act swiftly and in the best interest of the microbusinesses they represent,” Josh Silverman, chief executive officer of Etsy, said in a statement to MarketWatch.
The company already increased the fees it charges its sellers earlier this month, which will allow Etsy to increase direct marketing spending and make investments in new features such as customer support, the company told MarketWatch.
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States have lost billions of dollars because of Quill, studies suggest. Forty-five states have a sales tax and estimate there was $26 billion they could not collect via online or mail orders, according to the Pew Charitable Trusts, a public policy nonprofit organization.
Brick-and-mortar businesses suffer a competitive disadvantage because they must collect sales tax when some online vendors do not, according to Pew. (Amazon, Walmart WMT, +0.72% and Target TGT, -0.13% collect sales for goods they sell online, but not those sold by third-party vendors on their platforms.)
“Back in the day people in Pennsylvania bought stuff from Pennsylvania, but with the internet and technology, now businesses can sell all over the world,” said Keith Hall, president and chief executive officer of the National Association for the Self-Employed.