AMZN Amazon.com Inc

Supreme Court weighs levies on third-party goods sold on Amazon and other marketplaces

By Richard Rubin and Laura Stevens 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (April 16, 2018).

Billions of dollars of goods sold each year by independent merchants on Amazon.com and other online marketplaces would be vulnerable to state sales taxes for the first time if justices decide to reverse a quarter-century-old precedent in a case before the Supreme Court this week.

In the case, South Dakota is seeking to overturn a longtime precedent under which states can't require retailers to collect sales taxes unless the companies have a physical presence in the state. While Amazon.com Inc. itself collects sales taxes on its own products, it does not on most others' sales through its platform.

Justices on Tuesday will hear arguments in the case, South Dakota v. Wayfair Inc., and a decision is expected by the end of June.

The current tax rules -- from the era of mail-order catalogs -- helped fuel the rise of internet commerce and spurred frustration among brick-and-mortar retailers, shopping-mall owners and state governments.

Tax and legal experts expect the court to overturn the precedent, freeing states to collect levies on future cross-state transactions. It isn't clear what new standard might take its place or what rules states might impose.

President Donald Trump recently put the issue of sales-tax collection in the spotlight as part of his repeated attacks on Amazon, which people close to the White House attribute largely to his dislike of coverage of his administration by the Washington Post, owned separately by Amazon Chief Executive Jeff Bezos. Mr. Trump said that Amazon avoids taxes and that its growing dominance is "putting many thousands of retailers "out of business."

The biggest effects would be felt on online marketplaces, where between $3.9 billion and $6.2 billion in taxes could have been collected on goods sold by smaller vendors in 2017, according to the Government Accountability Office. On such marketplaces, run by Amazon, eBay Inc. and others, independent sellers give the platforms a cut of their sales.

Merchants selling goods on Amazon's global marketplace last year made up nearly two-thirds of gross merchandise volume, which totaled $313.4 billion, according to Factset analyst estimates. Half of all items sold come from those small or midsize businesses, according to Amazon.

A few states, including Washington and Pennsylvania, have already started trying to tax third-party online marketplace sales, and those efforts could accelerate after a Supreme Court decision.

"It could be read as a green light to 'Go for it, states,' and they will go for it," said Richard Pomp, a law professor at the University of Connecticut.

The 1992 opinion, in the case of Quill Corp. v. North Dakota, held that the Constitution's commerce clause limited interstate tax enforcement without congressional assent. Justice John Paul Stevens said it was up to Congress to set nationwide rules for cross-border sales-tax enforcement, but Congress hasn't done so.

State governments and brick-and-mortar shops argue the 1992 precedent harms state treasuries and disadvantages taxpaying homegrown businesses. In a related case three years ago, Justice Anthony Kennedy, who voted for the Quill ruling in 1992, filed a concurring opinion suggesting the time had come to reconsider the question. South Dakota quickly enacted a tax statute designed to give the high court such an opportunity.

The state sued Wayfair, an online home-goods retailer, and other larger internet-based sellers. The South Dakota Supreme Court sided with Wayfair under the 1992 precedent, and the state then appealed. Wayfair says it collects and remits taxes on about 80% of its sales.

States, large retailers, shopping-center owners and the Trump administration want the court to let states extend sales-tax collections to online merchants based elsewhere. They argue that technological advances made the physical-presence standard set out in the 1992 precedent obsolete and that the ruling has left holes on Main Streets and in government budgets.

South Dakota asks the court to extend state authority over merchants with an "economic presence" in their territory, arguing that it is a better reflection of business ties to a state than the 20th century "physical presence" standard. The South Dakota law would extend the collection mandate to sellers doing at least $100,000 of business or conducting more than 200 transactions with state residents.

"It is clearly a competitive disadvantage if you are required to collect sales tax and some competitor isn't," said Tom McGee, president and CEO of the International Council of Shopping Centers.

States say software can help online sellers comply with multiple taxing jurisdictions and definitions and that small-business exceptions could soften the compliance burden.

Conservatives and online retailers warn about expanded state power and fear states would reach outside their borders to audit sellers with no representation.

In the early days of e-commerce, Amazon prospered by lacking a physical presence in many states. The company could ship goods from a few places and most consumers wouldn't pay sales taxes, giving Amazon a discount over in-state companies. States, retailers and shopping mall owners pressed Congress for a federal standard for taxing out-of-state sellers. Congress hasn't acted.

As states started getting more aggressive in defining physical presence, Amazon built a network of distribution and fulfillment centers that allow faster delivery. Now, the company collects taxes on its own sales in all 45 states with sales taxes and has some voluntary agreements for tax collection with municipalities. In most cases, however, it doesn't collect taxes on sales by other parties on its marketplace.

Amazon declined to comment. The company supports federal legislation but hasn't weighed in on the court case.

"A world in which state tax power is unbounded by geography is undoubtedly a world that is bad for Amazon," said Andrew Moylan, executive vice president at the National Taxpayers Union Foundation, which wants the court to preserve the physical-presence standard.

Amazon typically collects a roughly 15% cut for items sold by outside vendors on its site, plus warehousing and logistics fees. In addition, it doesn't have to take inventory risk while increasing its selection. In its most recent quarter, its seller-services revenue grew 41% to $10.52 billion.

Other online retailers with a stake in the Supreme Court case include eBay and the Trump Organization's own e-commerce operation, TrumpStore.com, which doesn't collect taxes for the vast majority of states. As of earlier this month, TrumpStore.com collected sales tax for merchandise shipped to Louisiana and Florida, and the website now indicates that it also collects sales taxes for products shipped to Virginia.

--Jess Bravin contributed to this article.

Write to Richard Rubin at richard.rubin@wsj.com and Laura Stevens at laura.stevens@wsj.com

(END) Dow Jones Newswires

April 16, 2018 02:47 ET (06:47 GMT)

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