South Carolina could pocket a new stream of revenue after the U.S. Supreme Court cleared a path for states to collect sales tax from online retailers, but e-commerce isn’t expected to produce a windfall for the state’s coffers.
The reason: South Carolina collects sales tax from most online retailers already.
The nation's highest court ruled in a 5-4 decision Thursday that states can make online shoppers pay sales tax, even if they aren’t buying from a retailer in their home state.
But the significance of the decision is muted by the current landscape for online shopping: Most of the biggest Internet retailers, such as Walmart and Target, also run brick-and-mortar stores.
And the biggest of them all, Amazon.com, collects sales tax under an agreement it inked with the state in 2011 to build a massive distribution center outside Columbia.
All told, that means South Carolinians would be paying a hefty sales tax bill online with or without the Supreme Court decision.
Rick Reames III, the former director of the S.C. Department of Revenue, said South Carolina was collecting taxes from 22 of the 25 biggest online retailers when he left his post last year.
Still, the ruling upends decades of precedent that limited states’ taxes to businesses with a physical presence within their borders. But the court decided that framework was untenable in the modern economy, where e-commerce accounts for about a tenth of all shopping activity.
The ground shift in retail is now trickling into state governments’ coffers. In South Carolina alone, the state has estimated that online sales could net about $440 million in annual tax revenue.
It isn’t clear exactly how much of that sum is already captured today, but state lawmakers appear willing to seek out more of it. The Senate approved by a wide margin last year a measure that would require large e-commerce sellers to collect tax. The bill later ran out of time in the House of Representatives.
"Hopefully we can move forward bringing parity for our brick and mortar stores so they are not (at) a disadvantage," the bill’s sponsor, state Sen. Marlon Kimpson, D-Charleston, said in a tweet.
The state tax agency might beat lawmakers to the punch. Reames, now an attorney in Columbia, said the Supreme Court’s decision "opens the possibility of immediate action by state taxing agencies."
The Department of Revenue is looking into that possibility. The agency said in a statement that it would "review the ruling before putting a formal collection process in place."
"Large online retailers who enjoy the benefits and privileges of doing business in South Carolina should be required to pay the same sales tax that traditional South Carolina brick-and-mortar retailers currently pay," agency spokeswoman Bonnie Swingle said.
That effort isn’t over, because many transactions are still slipping through the cracks. The state is fighting with Amazon, for instance, about whether the e-commerce giant should collect tax for the third-party sellers on its website. It currently does not, and the Revenue Department claimed $12.5 million in missed taxes over in just three months.
The Supreme Court decision was cheered by brick-and-mortar retailers that hoped their online competitors would lose the advantage of effectively tax-free sales. And it was backed by some 41 states who wrote justices that the physical presence rule previously backed by the court had dented their authority.
Justice Anthony Kennedy wrote that the court’s previous decisions were flawed.
"Each year the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the states. These critiques underscore that the physical presence rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause," he wrote.
Online sellers that don't charge sales tax on goods shipped to every state range from jewelry website Blue Nile to pet products site Chewy.com to clothing retailer L.L. Bean. Sellers who use eBay and Etsy, which provide platforms for smaller sellers, also aren't required to collect sales tax nationwide.
The case the court ruled in has to do with a law passed by South Dakota in 2016. South Dakota's governor has said his state loses out on an estimated $50 million a year in sales tax that doesn't get collected by out-of-state sellers.
Lawmakers in the state, which has no income tax, passed a law designed to directly challenge the Supreme Court's 1992 decision. The law required out-of-state sellers who do more than $100,000 of business in the state or more than 200 transactions annually with state residents to collect sales tax and turn it over to the state.
South Dakota wanted out-of-state retailers to begin collecting the tax and sued several of them: Overstock.com, electronics retailer Newegg and home goods company Wayfair. The state conceded in court, however, that it could only win by persuading the Supreme Court to do away with its physical presence rule.