FOR years, online retailers in America have enjoyed an unfair advantage over their bricks-and-mortar competitors. Unless they were physically located in the same state as a shopper, they were not obliged to collect state and local sales taxes. Shoppers were still legally required to pay taxes on their online purchases, but not everyone did in practice. Many instead to chose to treat the internet as a place to find discounts. Given that state and local taxes can add up to as much as 12% of a product’s prices, the potential savings were substantial. This practice is now coming to an end. On June 21st America’s Supreme Court ruled that online retailers would finally have to start collecting sales tax themselves.

The company that has benefited most from this loophole is probably Amazon, America’s biggest online retailer. When it started out, it collected sales taxes only from customers who lived in its home state of Washington. In recent years, however, Amazon has built distribution centres all across the country, making it necessary to start collecting state and local sales taxes in more and more states. In April 2017 Amazon announced it would collect taxes on goods that it sells directly in all 45 states where such levies exist.

As a result, Tom Forte of DA Davidson, a bank, argues that if anything, the ruling will help insulate Amazon against any upstarts who would have used the online-tax loophole to undercut it. It also means that shoppers will no longer have an incentive to use the website as a search engine before decamping to other online retailers. Amazon, which once lobbied against legislation requiring online retailers to charge sales tax, has in recent years switched to lobbying in favour of them.

Bricks-and-mortar retailers celebrated the decision, but given that Amazon is already in compliance with the new rule for its own sales, the benefits may be limited. Moreover, consumers do not just shop online to save on taxes; they also do so because it is more convenient. The one group of companies that might actually see a substantial boost in sales are consumer-electronics retailers, such as Best Buy. This is because shoppers are much more likely to care about tax savings when it comes to big-ticket items. Consumers are especially mindful of sales tax when it comes to expensive, brand-driven products such as televisions, notes Peter Keith of Piper Jaffray, another bank.

To the extent that Amazon will be hurt, it is because it will need to start collecting sales taxes on third-party vendors which sell through its website. Higher prices could depress sales, and with it the fees that the company collects from vendors. Other online marketplaces, such as eBay and Etsy, face similar difficulties.

It is unclear exactly when any new tax laws will come into effect. South Dakota, which brought the case in front of the Supreme Court after passing a law that forced large online retailers to collect sales tax last year, could be ready in a matter of weeks. Other states, however, might need to pass entirely new legislation. This, combined with the need to set up the right administrative infrastructure, means that some states might not start collecting the taxes for over a year, reckons John Buhl of the Tax Foundation, a think-tank. It is also unclear how much tax authorities stand to gain. A study published last year by America’s Government Accountability Office found that state and local governments could see their annual sales-tax revenues rise by $8.5bn-$13.4bn, or by around 2-4%, based on retail sales in 2017. The Marketplace Fairness Coalition, which advocated for the ruling and based its figures on sales in 2018, thinks the increase could be closer to $33.9bn.

The ruling presents challenges for small online businesses, which may not have the resources to comply with the full labyrinth of America’s local sales-tax laws now that the onus is squarely on them to make sure that they are paid. (That may actually help online marketplaces, which can start providing software solutions for vendors.) In his dissent, John Roberts, the chief justice, noted the country had over 10,000 tax localities, many of which have their own arcane laws on how different products should be taxed. In Illinois, for example, Twix bars are categorised as food, and are hence taxed differently than Snickers bars, which are considered to be candy. The reason? The former contain flour.

Source: economist
Amazon wins from a Supreme Court ruling