DALLAS _ President Donald Trump put the spotlight this week on what taxes Amazon.com pays, but one of his complaints may soon be erased by the U.S. Supreme Court.
The Supreme Court will hear arguments April 17 in South Dakota v. Wayfair, a case that could require online sales taxes for all purchases. The case is a direct challenge to a 1992 decision in Quill Corp. v. North Dakota that prohibits states from requiring retailers to collect sales taxes if the seller doesn't have a physical presence in the state.
Texas was among the first states to require Amazon to collect sales taxes under the Quill decision when the company was still trying to avoid collecting sales taxes from its customers.
Amazon has been collecting state and local sales taxes in Texas since 2012, longer than in most states. And while some cities in other states bemoan the fact that their state governments require Amazon and others only to collect state sales taxes, Texas and most other states have a different deal.
When a Dallas resident or shopper in College Station or Lubbock makes a purchase from Amazon or any other online retailer with a physical presence in Texas such as Wayfair and RH.com, the state gets its 6.25 percent. The cities get their local sales taxes too. In Dallas, that's an additional 2 percent for a total sales tax of 8.25 percent.
But that's not true for cities in Alabama, Alaska, Idaho, Iowa, Mississippi, New Mexico and Pennsylvania, according to a report from the Institute on Taxation and Economic Policy. The group said that while Amazon has been collecting state sales taxes across the U.S. since April 2017, cities are being left out because of their state rules.
"Sales taxes are important revenue for cities in New Mexico, for example, and those local officials will have to put pressure on their state lawmakers to change the law," said Carl Davis, research director at the Institute on Taxation and Economic Policy and author of the report.
It's a loophole that doesn't affect Texas, but could cause put cities in those seven states a bigger loss if the Supreme Court rules that online sales taxes can be levied across the board, without a physical presence test. That means all online purchases, not just those from Amazon, will be subject to sales taxes.
"And still cities in those states won't get a dime," Davis said.
Estimates are that in Texas, the state is missing out on $1 billion a year in sales taxes on purchases from online retailers who don't have a physical presence in the state.
Early on, Amazon put fulfillment centers in states with either no sales tax or a small population. When it started collecting sales taxes in Texas, it was doing so in only five states including its home state of Washington. The other states were Kansas, Kentucky, North Dakota and New York.
However, the physical presence rule still applies to third-party Marketplace sellers on Amazon. That's why some online purchases on Amazon don't generate sales taxes. And that's one way a Supreme Court ruling that eliminates the physical presence rule would benefit Texas. Amazon isn't required to collect sales tax on behalf of its third-party Marketplace sellers unless they ask Amazon to do so. Amazon charges them a fee to collect and distribute their customers' sales taxes to the states.
Texas is among 41 states that filed a brief asking the Supreme Court to remove the physical presence rules. The brief called them "artificial barriers" that block states from "full collection of owed tax revenue or infringe their sovereign authority to enforce their tax laws."
