With Supreme Court Ruling, One Perk Of Online Shopping Fades Away

Jun 25, 2018

Some online shoppers may have unwittingly been committing tax fraud for years. A Supreme Court ruling last week will make us honest consumers and could deliver a big chunk of change to Texas.

North Dakota v. Wayfair Inc. changes a pre-internet-era law that allowed companies selling goods across state lines to forgo collecting sales tax. Internet-era companies have been using the law to keep prices lower than their in-state rivals. Now, because of the ruling, sellers online and off both have to charge a state sales tax.

“It’s become harder to avoid paying a tax that is legally owed,” said Amanda Traphagan, a tax attorney in Austin.  

The state will be collecting the tax from out-of-state retailers that sell products to Texas consumers. Previously, those retailers weren’t made to pay the state; the burden fell on the consumer to report it, but consumers weren’t doing that.

“Whenever I tell anyone about it, they’re always surprised," Traphagan said. "They think that if the retailer doesn’t collect tax, then they don’t owe tax."

Texas’ large population puts it in a good position to make some money because of the ruling. The Texas Comptroller's Office puts the figure between hundreds of millions of dollars on the low end and up to $1 billion on the high end, adding to the more than $200 billion state budget.

But officials can’t say for sure.

“It’s a real complex law and we’re trying to figure out how that applies to Texas,” said Kevin Lyons, a spokesperson for the comptroller.

Trade groups like the National Retail Federation hope the ruling will put brick-and-mortar businesses on a level playing field with online sellers. There’s actually some evidence that consumers will change their buying habits because of a new tax. When Amazon opened distribution centers in Texas and other states around 2013, the online giant had to start charging local sales taxes – and customers started buying less.

“For those living in states like Texas and California and about a dozen others, people reduced their spending on Amazon by about 9 percent,” said Brian Baugh, a finance professor at the University of Nebraska at Lincoln. Baugh authored a study on Amazon as it started charging state taxes.  

While he found people did spend less on Amazon, they didn’t necessarily go to a local store. Price-conscious consumers would instead continue searching online until they found a deeper discount.

“The overarching theme is that people don’t like driving around town wasting the gas and time,” Baugh said, “and there’s the huge shift toward online shopping.”

E-commerce as a percent of total retail sales in the U.S. hasn’t gone down once since the Census Bureau started keeping track of the data in 1999. Right now, it’s at about 9.5 percent.

Online retailers that don’t have a physical presence in Texas may be required to pay the state soon, but it’s unclear when. The comptroller’s office is still figuring out if it needs to change or add to any state laws.