Editorial: Make online retailers collect taxes

In 45 states, pulling out your wallet and buying something is (with some exceptions) a taxable event. No matter where you buy that book, tool or toy, you owe an additional sum to your state and, in many cases, to your local government as well.

Thanks to decades-old Supreme Court decisions regarding mail-order catalogs, however, only a retailer with employees or offices in your state has to collect that sales tax from you. Those rulings have now given many online shoppers and out-of-state retailers an unfair advantage: They can ignore taxes when the sale is made, while consumers who buy locally and the stores who serve them cannot. Sure, online shoppers are legally required to pay the tax when they file their annual income-tax returns, but the vast majority don’t bother because states and cities can’t easily track online sales.

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This week, the Supreme Court heard arguments in a case that gives the justices an opportunity to overturn those earlier decisions, and they should seize it. The concern underlying the Supreme Court’s mail-order rulings in 1967 and 1992 — that the burden on retailers of complying with a panoply of differing state and local sales tax rates was too great — has been alleviated by technology. The goal now should be restoring fairness, which means treating all consumers in a state and all retailers who do business with them equally.

At issue in the case is a law enacted in 2016 by South Dakota, which relies heavily on sales taxes because it has no income tax. Concerned that the rise of online shopping would make it increasingly difficult to balance the state’s budget, lawmakers required online retailers with 200 or more transactions in the state per year or annual sales there of more than $100,000 to collect taxes on sales to South Dakota residents and remit the revenues to the state.

Three online retailers — Wayfair, Overstock and Newegg — challenged the law in state courts and won, setting the stage for South Dakota’s appeal to the Supreme Court. The justices heard arguments in the case Tuesday, with Deputy U.S. Solicitor General Malcolm L. Stewart joining South Dakota’s attorney general urging the court to overturn both the lower court rulings and its own earlier decisions.

The online companies argue that the U.S. Constitution bars states from requiring out-of-state retailers to act as tax collectors because that would impede interstate commerce — something only Congress is allowed to do. The impediment, they contend, is the burden on retailers of having to comply with a dizzying array of state and local sales tax systems, each with unique rates and exemptions.

It would be excruciating for online retailers to keep up with all those tax schemes if not for two important developments. First, software vendors have developed programs that automate the collection and remittance of state and local sales taxes. And second, a growing number of states (currently 23) have streamlined their state and local sales taxes to eliminate intrastate variations, make it simple and inexpensive for retailers to submit the taxes they collect, and shield retailers from liability for errors.

Defenders of the status quo often argue that a state has no right to tax retailers who have no employees or offices there. But retailers aren’t the ones paying the tax — consumers are. And there’s no reason to treat a shopper who buys a book online differently from one who visits a bookstore down the street.

Beyond that, the Supreme Court’s original decisions defined far too narrowly what it meant for a merchant to have a presence in a state. It’s not just where the merchant’s employees and offices are located — it’s where it advertises, where it hires people to deliver goods, where its packing materials wind up in landfills, and where it is obligated to provide repairs or replacements for defective products.

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At Tuesday’s arguments, several justices worried that overturning the earlier rulings would leave important questions unanswered, such as whether there should be a minimum number of sales into a state before a retailer would have to collect taxes, and whether states could require retailers to go back and collect taxes from prior years’ customers. Ideally, Congress would answer those questions in a law permitting states to require out-of-state vendors to collect sales taxes from their residents. But Congress hasn’t done so despite repeated efforts in recent years, and lawmakers may be more likely to act after the court overturns its previous rulings than before.

No shopper likes paying taxes, and no retailer likes to collect them. But as long as governments rely on sales taxes, the levies need to be applied with an even hand. The Supreme Court should level the playing field that it warped with its two earlier rulings and treat those who buy and sell goods in the virtual world no differently from those who buy them in the real one.