In 1992, the U.S. Supreme Court ruled that states can’t require retailers without a physical presence within their borders to collect and remit sales taxes on purchases made by local residents.
At issue were catalog and other mail-order sales. The court’s ruling meant Indiana could require Sears to collect a sales tax from anyone making a purchase through its catalog because Sears had stores in the state. But it could not require other retailers without a local presence to charge or collect sales taxes for mail orders. Instead, states were left to collect from individuals, who were supposed to declare catalog purchases on their income tax returns and pay a use tax, something few Hoosiers actually did.
The 1992 court decision was annoying for leaders in Indiana and other states who knew they were missing out on revenue. But it wasn’t a huge problem. At the time, catalog sales accounted for about $35 billion, the World Wide Web had just been born, and Amazon wouldn’t sell its first book for another three years.
Most people bought their stuff at local stores.
By 2015, remote sales—a category that still includes catalogs but also everything digital—had climbed to nearly $300 billion, according to the U.S. Census Bureau.
But the Supreme Court’s decision still stands—and that’s not OK anymore with states. We don’t blame them. The sales tax is a long-established way for state governments to pay for the services their constituents demand—and it’s ridiculous to allow some retailers to skip it.
States have made progress in this area, despite the court’s action. Amazon, for example, collects and remits sales taxes under agreements with state governments. That’s a big deal, given that the retailer accounts for more than 40 percent of all online sales in the United States, according to Slice Intelligence.
Other retailers, though, have fought state efforts to require them to collect sales taxes. In Indiana alone, researchers have estimated the state could be losing out on $77 million to $195 million in sales taxes.
Now, Indiana and others are challenging the status quo with laws that require all larger retailers to pay the taxes—essentially inviting a court challenge. South Dakota got just that when Wayfair Inc., Overstock.com Inc. and Newegg Inc. sued. A federal court has ruled against the state, but the goal is to get the issue back to the U.S. Supreme Court.
The first choice, of course, would be for Congress to step into the issue. For years, states have pushed for Congress to make the court’s input moot by requiring retailers to follow state laws. But federal lawmakers have failed to act, largely out of fear they will be accused of voting for tax increases.
Barring congressional action, we urge the Supreme Court to take up the sales tax issue again. The justices might not be able to reach a different conclusion under the U.S. Constitution’s commerce clause, which bans states from regulating interstate commerce. But the retail world has changed dramatically—and will keep changing—and the issue therefore deserves another look.•
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