E-commerce is a breeding ground for new businesses for many reasons. For starters, it requires little overhead. It also provides access beyond the local market, and for the most part, an evasion of collecting state taxes. This technicality is all due to a Supreme Court Ruling from the nineties, Quill v. North Dakota.
Quill v. North Dakota
Back in 1992, the Court ruled that unless a company had a physical presence in a state, such as a headquarters, brick-and-mortar store, fulfillment center, it did not have to collect state taxes. This loophole has given an advantage to online retailers and to the consumers who manage to save a couple of bucks on a purchase. But, it turns out, that it’s been costing states an average of $33 billion a year, according to a report from Racked.
South Dakota vs. Wayfair
In fact, South Dakota missed out on an estimated $48-58 billion. Consequently, this led to South Dakota vs. Wayfair. South Dakota enacted a law that constitutes that online retailers must collect taxes on purchases made in the state. However, retailers Wayfair, Overstock.com, Newegg, and Systemax did not comply.
The Washington Post reported that an audit from the Government Accountability Office found that states lost around $13.7 billion in taxes in 2017. Moreover, Justice Anthony M. Kennedy expressed concern before the decision in favor of South Dakota. He said that this form of tax evasion is “inflicting extreme harm and unfairness on the states.”
South Dakota vs. Small Businesses?
Wayfair lamented the decision in favor of South Dakota saying that it could wipe small businesses off the map. Interestingly enough, despite that argument, the implementation may help local brick-and-mortar establishments. Now, interstate online retailers won’t be able to charge lower prices than the local ones, and it may help drive sales.
Also, consumers may see an increase with some purchases. But, many will not be affected as most major chain stores already have physical presences in each state. That means consumers are already paying tax anyway.