U.S. Markets closed

Small businesses will be the losers in the Supreme Court's online sales tax case


It’s all about small businesses. During a high-profile Supreme Court case about Internet sales tax on Tuesday, both sides emphasized the interest of small businesses in their arguments.

In South Dakota v. Wayfair Inc. (W) case, states want to reverse a 1992 ruling known as Quill v. North Dakota, which requires retailers to collect sales tax only if they have a physical presence in a state. They believe the ruling is obsolete, making states lose massive revenue while hurting small businesses.

“Our small businesses on Main Street are being harmed because of the unlevel playing field created by Quill, where out-of-state remote sellers are given a price advantage,” Marty Jackley, South Dakota’s attorney general, argued.

George Isaacson, a lawyer representing Wayfair and other online merchants in the case, believes small online businesses will bear the cost if the 1992 ruling gets overturned.

“If you increase the cost of admission, if you have barriers to entry, one of the inevitable effects is going to be that those small and medium-sized companies are going to be deterred and there will be even greater concentration by the largest retailers,” said Isaacson.

In a debate where opposite sides claim to protect small businesses, Justice Sonia Sotomayor asked, “Is there any brief I can read or any source to determine what constitutes a small business in America?”

It’s hard for small businesses to win

States argue they want to collect internet sales tax to help local merchants level the playing field with their online competitors. (CNBC)
States argue they want to collect internet sales tax to help local merchants level the playing field with their online competitors. (CNBC)

The case highlights how small and middle-size retailers have become the center of the debate in sales tax collections. Though President Donald Trump has repeatedly accused Amazon of not paying taxes, 19 of the 20 largest Internet retailers, including Amazon (AMZN) and Walmart (WMT), do collect taxes in most states since they have gradually established a local physical presence across the U.S. But smaller sellers have largely avoided collecting taxes because of ambiguous laws and complex tax codes that vary in each state. States argue this pits small businesses that are not headquartered in their hometowns against locally based retailers.

“Small businesses are not being treated fairly,” said Jackley. We’re not asking remote sellers to do anything that we’re not already asking our small businesses to do in our state. And that is simply to collect and remit a tax.”

Justices also asked about the cost of implementing the sales tax program, and if there should be a minimum sales requirement on small businesses that would be subjected to the sales tax. South Dakota’s current law requires companies with at least $100,000 in sales or 200 transactions in the state to collect and remit sales taxes.

The increasing trend of more brick-and-mortar stores expanding their online presence further complicates the arguments in the case. According to a survey by Clutch, a Washington, DC-based research firm, over 70% of all small businesses have a website, though this doesn’t necessarily mean they sell products online.

Some justices worry that favoring either side in the case would ultimately benefit large companies. Amazon, for example, now provides third-party sellers on its site with a tax calculation service, but charges 2.9% of all sales. Piper Jaffray estimates more sellers will sign up for the Amazon service if they are faced with a complex sales tax environment, helping to boost a high-margin revenue stream for Amazon.

“Now there’s something a little bit ironic in saying the problem with Quill is that it benefited all these companies, so now we’re going to overturn Quill so that we can benefit the exact same companies,” said Justice Elena Kagan on Tuesday.

A decision on South Dakota v. Wayfair Inc., is expected to be reached by July.

Krystal Hu covers technology and economy for Yahoo Finance. Do you think online sellers should collect sales tax? Write to Krystal at krystalh@oath.com or follow her on Twitter

Read more:

Apple CEO Tim Cook on Facebook data leak: Regulation is necessary

Amazon and Whole Foods clash over products like Coca-Cola

How to bet on Amazon without buying Amazon stock