Supreme Court’s Wayfair Decision Will Hurt Online Shopping

Thursday’s Supreme Court decision has changed how states can tax online shopping. In South Dakota v. Wayfair Inc., the court upheld a state law that allows South Dakota officials to collect sales taxes from other states’ businesses that sell to South Dakota residents. The court’s decision is a loss for consumers, small online businesses and the future of e-commerce.

The justices overruled the 1992 Supreme Court decision Quill Corporation v. North Dakota, which set the standard for how states tax online purchases. Until now, states could tax only businesses that have a physical presence — like stores or warehouses — in their state. This decision is a huge departure from legal precedent and threatens a devastating increase in tax compliance costs for online entrepreneurs, like sellers on Etsy and eBay.

This ruling subjects small internet-based businesses to “taxation without representation.” The seller must now calculate, collect and remit sales taxes to whichever state a buyer lives in, including those in which the seller has no stores or employees and no voting power or political voice. Online businesses will now be responsible for adhering to this compliance burden and could be audited as a result.

Think of it like this: When you pull into a gas station to fill up, the attendant does not check your license plate or driver’s license in order to charge you the tax rate of your home address and send off payment to your state’s tax authorities. The owner of the gas station calculates the tax based on the station’s location, collects it from you and sends the taxes to his local authority.

This approach preserves healthy tax competition among the states. New York can only hike gas taxes so high before everyone starts to drive across the border to New Jersey. Unfortunately, the Supreme Court’s decision does away with this competitive system for people who buy and sell online.

Now that states can export their tax policies and reach outside their borders to tax businesses in other states, that beneficial rivalry among states is diminished. That puts both the online buyer and the entrepreneur at a disadvantage. It is the online equivalent of the gas station attendant calculating your tax based on where you live, not where you are pumping gas. This means consumers can no longer vote with their wallets by taking their online purchases elsewhere.

With fewer political consequences, there is less incentive to keep tax rates reasonable.

States have spent years trying to reverse the Quill ruling and persuade Congress to pass supportive legislation. The problem is that online taxes are unpopular among voters. Bills like the Marketplace Fairness Act and the Remote Transactions Parity Act, both introduced last year, were doomed by high compliance costs for small businesses and by general opposition to more sales taxes online, but they may find a second wind after the new ruling.

With this decision, the Supreme Court underestimates the importance of preventing states from regulating and taxing the business owners of other states. Congress must now step in to consider plans for reforming online sales taxes to reduce the damage of the ruling. Legislators should act to clarify and reinforce the principles of physical presence and state tax competition.

The internet has presented enormous opportunities to people who dreamed of starting their own business, and American consumers have reaped the reward. There is no doubt that online shopping has made it much easier and more convenient for busy parents and rural Americans to get items they need for their families more quickly. Congress should get to work protecting this progress for the sake of all consumers and online entrepreneurs.

Originally published at The New York Times.

This article is republished with permission from our friends at the Competitive Enterprise Institute.