The Messy Fight Over Taxing Online Retailers

States want to collect sales tax from online sellers. Whether they’re successful or not, the only winner will be Amazon.

Toys “R” Us is going out of business at a time when other chains are downsizing or liquidating. States are understandably starting to panic—as retailers die and shoppers move online, sales tax revenue goes with them.

States are pushing back by trying to get the Supreme Court to overturn a decades-old ruling that prevents them from collecting sales tax on online retailers with no physical presence in the state. Regardless of what happens, the sales tax issue is turning conservative economics on its head and pitting Republicans against themselves. In this race to the bottom, the only winner may be Amazon.

Traditionally, states did all right as long as in-state retailers were strong. After the 2008 financial meltdown, they made up for lost income tax revenue by raising sales taxes. But things took a turn for the worse when brick-and-mortar retailers like Sears and Macy’s started closing hundreds of stores as online retailers gobbled up market share. States were losing to the internet in more ways than one.

The sales tax is unique politically. It is the least distasteful way to raise revenue amenable even to normally tax-adverse conservatives. While the income and property tax affect mostly the middle class and up, the sales tax affects mostly lower-income families, who spend nearly all of what they earn. The middle class has political muscle that the less-affluent don’t. So, from a politician’s point of view, it’s an easy choice.

It’s not so strange, then, that deep-red South Dakota is petitioning the high court to reverse the 1992 decision that is hamstringing state budgets. That ruling focused on mail-order catalogs, but has since been applied to online shopping—in 2017 alone, state and local governments missed out on an estimated $8 to $13 billion in tax revenues from online sales.

Even the Trump administration is piling on. In an amicus brief, Solicitor General Noel Francisco wrote that preventing states from levying sales taxes “imposes a competitive disadvantage on in-state retailers and encourages the state’s citizens to take their business elsewhere.”

But conservative activists oppose giving states more taxing authority. As Andrew Moylan of the National Taxpayers Union wrote, “the internet is big, powerful, and borderless. We must not let it become the vehicle for state tax and regulatory power to become similarly big, powerful, and borderless.”

If that sounds weird, it is.

Conservative groups typically favor federalism and states’ rights. But here, they are opposed. Weirder is the fact that their position pits them against other Republicans. Weirder still, in opposing states’ taxing authority, conservative groups look as if they are standing with Amazon and other sales tax-free internet merchants draining the wealth of small firms that make up the base of power for congressional Republicans back home.

But here’s the catch: they aren’t Amazon’s only apparent ally—so are the Republicans in South Dakota hoping the Supreme Court allows states to tax online sales. That’s because if the court overturns its previous ruling, sales from small online businesses in South Dakota would then be subject to tax laws in the other states as well as their municipalities. Some estimate the number of laws could be as much as 10,000.

This is terrifying for small firms not set up to deal with that kind of complexity. That’s why South Dakota’s lone member of Congress, Republican Kristi Noem, introduced a bill creating a uniform system. But Republicans from states that don’t levy a sales tax object to any law subjecting their constituents to another state’s taxes.

While Republicans tie themselves into knots, and while small firms worry about being ground to dust by 10,000 tax laws, Amazon is going to be just fine. Better than fine, actually. Just as Amazon has taken up where Toys “R” Us and other old-school retailers left off, Amazon will do the same when small firms from Republican states go under.

John Stoehr

John Stoehr is a Washington Monthly contributing writer.