The U.S. Supreme Court recently ruled that online retailers are responsible for collecting sales tax even if they don’t have a physical presence in the state where the purchase is made.

I would have written on this sooner, but I am still trying to digest the ramifications from this Supreme Court ruling.  The more I read about it though, the more unclear it becomes.

I have written before on the disastrous situation regarding 50 states with all differing sales tax policies.  There are only a few states that do not collect sales taxes on consumer goods.  Although I am a decentralist, I could see the benefit of actually having some kind of national policy regarding sales tax collection.  Like anything that Congress does though, they would probably just make it worse.

Most of the cases taken by the U.S. Supreme Court should never be heard at the federal level.  The Supreme Court usually abuses its power by taking jurisdiction over issues that should be settled at a state or local level.  With this case regarding sales tax collection, it is harder to say because there is a reasonable argument to be made that it does involve interstate commerce.

Although the Supreme Court made this ruling, it is not legislation.  Therefore, we don’t really know if it will be enforced or how much it will be enforced.  We don’t know how it will be enforced.  It reminds me of a quote attributed to Andrew Jackson to Supreme Court Chief Justice John Marshall saying, “John Marshall has made his decision; now let him enforce it.”

With this ruling, some are saying that Amazon will actually benefit because the company already collects sales tax in every state.  However, this is overlooking a major point.  About half of the products sold through Amazon are through third-party merchants.  There are many people who make a living selling their products through Amazon.  Most of these people do not collect sales taxes, except perhaps in the state where they actually reside.

What is to happen to these private retailers?  Amazon does not want to lose any significant percentage of this group.  But for a third-party merchant to collect taxes in all 50 states would be highly burdensome.  You would be registering (and oftentimes paying fees) to get set up in each individual state.  Each state’s form is different and the process of reporting the payments and sending them off to the state is different for each one.  It is a bureaucratic nightmare.

I suspect that most third-party merchants will just ignore this whole thing and take their chances.  Otherwise, unless they are making well into six figures or more per year, it probably won’t be worth the hassle (time and money).  There will be programs such as TaxJar that will either benefit greatly from this, or it may put them out of business.

Now let me explain that last part.  If the people at Amazon were smart at this stage, they would just set up sales tax collections on behalf of its third-party sellers.  Amazon has billions of dollars to work with and shouldn’t have too much trouble setting up systems to collect sales taxes for each state.

Many people on the outside think that Amazon sellers are complaining just because they don’t want to compete with brick and mortar stores.  But that isn’t really the biggest issue.  The biggest issue is the administrative headache of trying to collect sales taxes.  If Amazon did this on behalf of its merchants, I don’t think most sellers would mind.  They would probably be happy.

It gets even trickier when we start talking about Ebay and Etsy.  Of course, there are hundreds of more sites that sell products, which aren’t confined to one state.  Is someone selling $5 ornaments on Etsy going to collect sales taxes for every other state in the country? Is this seller who lives in Alabama going to pay hundreds of dollars to California to register a tax ID for the privilege of acting as a tax collector?

These are all real and valid questions that have yet to be answered.  I think enforcement is going to be very difficult because compliance is so difficult in the first place.  There is safety in numbers up to a certain point.  Is the federal government (or a state government) going to bring this to an absurd level and make an example out of someone who sells $100 (in revenue) per month?  If that happens, then something will change after the backlash.  At the very least, perhaps Congress will pass something that at least grants an exemption for those selling under a certain amount, say, $25,000 per month.

Stay tuned for where this whole thing goes.  I don’t expect it to dramatically hurt or help Amazon in the short term.  But for the long term, I think the executives at Amazon would be wise to collect all sales taxes on behalf of its sellers.  With one less headache, it would only encourage more sellers to join the Amazon platform.