California was already trying to wring more taxes out of online retailers months before the Supreme Court handed down a ruling that gave states permission to do so.
Last fall, more than 2,500 online retailers with out-of-state addresses received letters from California's Department of Tax and Fee Administration informing them that they appeared to owe sales tax here. It marked an escalation of the state's efforts to collect sales tax from online retailers — and their customers — since the state in 2012 struck a deal that compelled e-commerce behemoth Amazon to begin collecting sales taxes in California.
Nic Maduros, the tax department director, told a Senate committee in April the potential taxes from the companies who received the batch of letters could total "hundreds of millions of dollars" a year in revenue. "It's not an area we can afford to overlook," he said.
The Supreme Court's recent decision in South Dakota v. Wayfair could expand the playing field even further. The 5-4 ruling overturns a 1992 decision, Quill Corp. v. North Dakota, that allowed states to collect online sales taxes from sellers only if the seller has a physical presence in the state. States will be able to collect sales tax from all online retailers, provided they meet criteria to be determined by each state.
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The decision came as a victory to brick-and-mortar retailers, who were subject to state sales taxes and felt they were at a disadvantage to online retailers.
"In effect, Quill has come to serve as a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a State's consumers — something that has become easier and more prevalent as technology has advanced," Justice Anthony Kennedy wrote in the majority opinion.
Paul Cambra, a spokesman for the tax department, this week said it's too early to tell how the ruling will play out. Maduros at his confirmation hearing told lawmakers they might need to pass a new law to empower the department to collect taxes from more out-of-state retailers. At the hearing, he estimated the state was missing out on about $1.8 billion in revenue from internet retailers.
"The department is currently reviewing the court's opinion to determine next steps to support taxpayers," Cambra said. The Government Accountability Office estimated that in 2017, governments could gain about $8 billion to $13 billion if states were given the authority to collect from all remote sellers.
California has been able to collect tax from online retailers that have a physical presence in the state. State tax collectors also ask people who purchase goods online to report what they buy and pay sales tax, although few comply.
Companies that sell products through Amazon don't necessarily have to pay sales taxes. The Wayfair decision grants California the ability to collect both state and local taxes on all of Amazon's products.
Democrat Fiona Ma, a member of the Board of Equalization who is running for state treasurer, said the ruling helps brick-and-mortar retailers compete with their internet counterparts. She doesn't expect that paying taxes will stop people from ordering online.
"The original rationale was that people order online to save sales tax," Ma said. "Now, I think it's for convenience. People are busy. They don't have time to drive down to their local target to buy toilet paper. They'd rather call Amazon Prime and get it delivered."
Board of Equalization member George Runner, a Republican, said the state must be careful in how it carries out its new authority because confusing new tax laws could hurt entrepreneurs in other states. "These are frustrating tax laws that are frustrating to the taxpayer," he said. "As a result of the confusing tax laws, they don't know what to collect. That was my biggest frustration, and it still is."
However, Stephanie Martz, senior vice president of the National Retail Federation, doesn't expect that the court case will have a substantial impact on small businesses. South Dakota's laws, which were upheld in the Wayfair case, require merchants to collect sales tax only if they had more than $100,000 in sales or more than 200 transactions each year. The ruling is still significant to consumers who avoided brick-and-mortar stores for their extra sales tax, she said.
"I feel good about the Main Street seller without an online presence who doesn't have to worry about where people are shopping because of taxes," Martz said.
The Board of Equalization used to oversee sales tax collection, but the Legislature stripped the agency of that power a year ago and handed it to the newly created Department of Tax and Fee Administration. Maduros made collecting taxes from online retailers a priority soon after he took office a year ago. He started by asking employees to look for online retailers that promised same-day delivery but were not registered to pay California taxes.
"Where retailers have a physical presence here, they should be collecting and remitting that use tax," he said.
Before the Supreme Court decision, Maduros said some retailers responded to the department's letters by requesting permits. Others had attorneys respond. Their negotiations are ongoing. Online purchases make up about 9 percent of overall sales, according to May figures from the U.S. Census. "It's not an area we can afford to overlook," Maduros said.