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April 19, 2018

Supreme Court Hears Online Sales Tax Case

By  John Corrigan

In a case that could have major ramifications in the promotional products industry, the Supreme Court was divided Tuesday on whether internet retailers should have to collect sales taxes in states where they have no physical presence.

Led by South Dakota, states argued in an opening hearing this week that they’re missing out on tens of billions of dollars in annual revenue due to the 1992 decision Quill Corporation v. North Dakota, which said the Constitution bars states from collecting sales taxes from companies that don’t have a substantial connection to the state. In addition, brick-and-mortar businesses claim it’s an uneven playing field because they have to charge sales taxes while many of their online competitors do not, ABC News reported.

Overturning the decision (which takes the approval of five Supreme Court justices) would have a major impact on web-based promo firms such as BEL USA, parent company of supplier BEL Promo (asi/39552), distributor Branders.com (asi/145021) and Top 40 distributor DiscountMugs.com (asi/181120). In November, the company reached its highest sales ever on Cyber Monday, up more than 20% from last year.

“We believe there’s merit to both sides of the online tax collection argument,” said Sai Koppaka, president and CEO of BEL USA. “As online commerce grows, the states feel like they’re losing out on tax revenue. Collecting taxes can also create a level playing field for online versus offline distributors. Such a change could open up new business opportunities for large online distributors such as affiliates, out-of-state employees, etc., but it could create a complex and onerous burden for small online firms.”

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The potentially massive hit to those small online firms has left several Supreme Court justices reluctant to overturn the original decision. In the case in question – South Dakota v. Wayfair – Justice Sonya Sotomayor believed overturning Quill would introduce “a whole new set of difficulties” and suggested that Congress, having the authority to implement national rules, would be the right forum to solve the issue, The New York Times reported.

“My concern is that our industry is comprised of many small businesses and work-from-home distributors, and this creates additional challenges because of keeping up with expected changing rules,” said Chris Piper, vice president of business development at Top 40 distributor Proforma (asi/300094). “Software can help, but it’s expensive for small businesses to maintain and justify. Then there’s the risk that a mistake could lead to a lawsuit from a state if that small business owner collected too little or too much.”

States missed out on about $13.7 billion in 2017, according to a Government Accountability Office audit. The Trump administration has sided with the states, saying a virtual presence in the state is equivalent to a physical one. Despite President Trump’s recent criticism that Amazon avoids its tax obligations, the e-commerce juggernaut already collects sales tax in all 45 states that have one, as well as the District of Columbia.

“I’ve spoken to some distributors who have no problem collecting sales tax from more customers, if there were an easy way to do it,” Piper said. “It’s important to understand and have clarity that sales tax regulations do vary between state and local governments – not just tax rates, but which products in our industry qualify and how they’re classified. It could certainly upset the industry’s apple cart in more ways than we truly know right now.”

The lack of uniformity among sales tax regulations would be an administrative nightmare, said Larry Cohen, CEO of Top 40 distributor Axis Promotions (asi/128263). Because of the structure of the industry, suppliers and distributors would have to subscribe to the same process for overall consistency. But there are still some companies, Cohen said, who don’t believe in automation and handle everything manually. “I don’t see an easy solution to it,” he told Counselor. “The challenge for small businesses would be insurmountable.”

Jamie Stone, president of Seattle-based Gifts By Design (asi/205947), wonders if this will open the door to all retailers having to collect sales tax in the states that they sell to, whether they have a presence in those states or not.

“We’re in Washington State, but we have to charge California sales tax and report it to California when we sell and ship there, even though we have no presence there,” Stone said. “I think the tide is changing from online retailers having the advantage of not having to charge sales tax in states where they have no presence, to becoming disadvantaged in comparison to other brick-and-mortar retailers who can ship out of state and not collect sales tax.”