Last year in a 5-4 decision, the Supreme Court ruled in South Dakota v. Wayfair that states could collect sales taxes on purchases made online from a vendor whose “physical presence” was not within the state of purchase. One of the prevailing arguments made in favor of states to tax online out-of-state purchases was that it would serve to protect small mom-and-pop businesses that were subjected to in-state sales taxes. That rational was dubious at the time, and the Court’s ruling has proven to most negatively impact these small businesses.
The Wall Street Journal reports that “states have since enacted disparate rules, which as we warned are straining small business. As a case in point, the Kansas Department of Revenue will now require all out-of-state retailers to collect sales tax no matter how much business they do in the state. This includes college students selling used textbooks on eBay and retirees hawking a few hand-made greeting cards on Etsy .”
Following the Court’s ruling, Investor’s Business Daily predicted that online retailers “will soon have to comply with nearly 10,000 different tax jurisdictions across the country in the 45 states that impose taxes. That means different rates, varying definitions of products, and a variety of exemptions. The resulting complexity is mind-boggling.” Well, prediction is now reality.
Evidence is now revealing that the real losers from this ruling are those same small businesses the online-interstate tax advocates claimed they were seeking to protect. While Justice Anthony Kennedy, who voted with the majority, asserted that “the physical presence rule … has limited States’ ability to seek long-term prosperity,” he seems to have ignored the fact that this prosperity comes at the expense of small business. Now, these businesses are accountable for paying taxes not only within the state of their physical presence but in all the states. So much for federalism.