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Supreme Court Opens The Door To Internet Taxes — What Comes Next Could Be A Lot Worse

By Investor’s Business Daily

Taxes: Whatever you think about the issue of taxing internet sales, the simple fact is that the Supreme Court has just guaranteed that people across the country will now be paying more in state taxes. It’s hard for us to see how this is good news.

In its 5-4 decision on South Dakota v. Wayfair, the court overturned two previous rulings that prevented states from taxing sales of out-of-state companies. That meant a catalog company based in Maine didn’t have to navigate 45 state sales-tax laws to figure out how much each customer owed, and then remit that money to the right states.

Brick-and-mortar stores have been trying to lift this ban for decades, because, they say, it unfairly tilts the playing field in favor of catalog and online retailers. According to the Government Accountability Office, this break cost states up to $13.4 billion in lost revenue last year alone. And, retailers say it cost jobs and hurt local economies.

Not surprisingly, Amazon.com (AMZN), Shopify (SHOP), Etsy (ETSY), Wayfair (W) and other e-commerce stocks dropped on Thursday.

The Supreme Court ruling was notable not just because it did something it rarely does — namely, overturn previous decisions. (The most recent, Quill v North Dakota, was in 1992.) The court also split in a highly unusual way.

On the majority side were rock-ribbed conservative Justices Clarence Thomas, Samuel Alito and Neil Gorsuch, who sided with Justice Anthony Kennedy’s opinion. But so did stalwart liberal Justice Ruth Bader Ginsburg. Kennedy argued that the explosive growth of online retail rendered the court’s previous rulings outdated.

Three of the other liberals on the court, Justices Stephen Breyer, Elena Kagan and Sonia Sotomayor, sided with Chief Justice Roberts’ dissent. Roberts argued that it should be up to Congress to make a change like this.

Whatever the merits of the decision, the Court’s ruling means not only higher taxes for consumers, but higher prices.

Keep in mind that despite online retail’s explosive growth, the internet still accounts for less than 10% of all retail sales in the U.S., according to the Census Bureau. Plus, at least some of that growth represents entirely new sales that never would have occurred in an offline world.

At the same time, the ruling means that online retailers — large and small — will soon have to comply with nearly 10,000 different tax jurisdictions across the country in the 45 states that impose sales taxes. That means different rates, varying definitions of products, and a variety of exemptions. The resulting complexity is mind-boggling.

In New York, for example, clothing and footwear costing less than $110 is exempt from state sales tax, but not in some local jurisdictions. New York taxes shower caps and walking boots, but not swimming caps or hiking boots, says Avalara (AVLR), which makes automated tax software.

Some states treat diapers as a health care item exempt from taxation, and others treat them as clothing. A few years ago, Wisconsin issued a 1,437-word bulletin explaining how the state taxed different forms of ice cream cakes. Then there are the various state tax “holidays” meant to goose sales.

It is true that some states have tried to simplify their sales taxes to reduce compliance costs. And there are consulting firms that can help companies navigate this minefield.

But there can be no doubt that this ruling means a higher cost of doing business. In fact, Avalara stock shot up 13.5% after the court’s ruling. Tax complexity is always good news for tax consultants.

In addition, smaller online firms will now be at a disadvantage, not only with local brick-and-mortar businesses that only have to comply with one state’s sales-tax laws, but against online giants that can easily absorb the extra compliance costs.

More Taxes To Come?
Worse still, the court may have opened the door to letting states impose other taxes on out-of-state firms.

Grover Norquist of Americans for Tax Reform argues that states could use this ruling to impose corporate taxes and even income taxes across state lines.

“If physical nexus is no longer required for sales taxes ,then it is no longer required for personal or corporate income taxes,” he said. “Now, California (or any state or city that loses population through exit) can tax people and businesses who do their best to avoid that state or city.”

If you think that’s a fanciful prediction, you haven’t been paying attention. State governments will take every opportunity they can to raise taxes — especially if their own residents aren’t the ones paying them.

In the end, it makes Supreme Court Chief Justice Roberts’ dissent look all the wiser.

As he noted, the online retail industry has thrived up until now based on the existing rules regarding sales taxes.

“Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy,” he wrote, “should be undertaken by Congress.”