Utahns will soon start paying the taxes they already owed but almost never paid after the U.S. Supreme Court ruled in favor of states that require online businesses to collect sales taxes on Thursday.
That means that about $285 million in sales taxes that the state expected would be owed but not paid will soon be collected at checkout while shopping online — if lawmakers act to do so.
The court overturned its 1992 ruling and opened the door for states to pass laws that require businesses making online sales – rather than consumers – to be in charge of collecting sales taxes and handing them over to the state.
That’s as it should be, says Rep. Steve Eliason, a Republican and accountant from Sandy who chairs the House Revenue and Taxation Committee. People were already supposed to pay taxes on their online purchases if the business didn’t do it for them, but about 1 percent of them did, he said.
“Taxes are complex enough,” Eliason said. “But to literally keep track of what you buy and what rate [was more difficult]. It’ll be much easier for taxpayer compliance.”
The court found its 26-year-old ruling in a North Dakota case “unsound and incorrect,” and upheld a South Dakota law requiring businesses with over $100,000 in annual sales or over 200 sales a year to collect state sales taxes.
Utah was already preparing for the change, which will be a boon for big manufacturing companies. That’s because the state Legislature already passed a bill that commits nearly a third of the projected windfall to a manufacturing tax break.
On the final day of the legislative session in March, the House approved a bill that created an $83 million tax break for large manufacturing and mining companies in the event the long-awaited high court ruling came down in favor of states. The companies will no longer have to pay sales taxes on certain business-related purchases, thanks to SB233.
The Utah Taxpayers Association, whose president, Sen. Howard Stephenson, long advocated for the tax break, heralded the court’s ruling.
“For too long out-of-state online retailers have had the upper hand over our local, in-state stores,” Billy Hesterman, the group’s vice president, wrote in a statement. “This ruling now levels the playing field and allows the market to pick the winners and not an antiquated tax law.”
Utah cut a deal last year under which the nation’s biggest online retailer, Amazon, had voluntarily begun collecting state sales tax from its Utah customers. Those taxes are collected on direct Amazon sales, not ones it handles from third party retailers.
State officials have been mum about how much that boosted revenue, but in an early attempt to gauge the impact based on overall tax collections, The Tribune estimated Amazon-related revenue was around $32 million to the state and another $14 million to local governments.
Utah lawmakers are already gearing up for a possible special session to tweak the state tax code to adjust for changes made last year by Congress. It’s not clear whether the Legislature will also add a requirement for online sales taxes if it does meet again this year.
“We’re going to be looking carefully at it because we want there to be a reasonable and easily administered process for online collection,” said Sen. Curt Bramble, a Provo accountant and Republican who sits on the Senate’s tax committee.
Bramble said he spoke with John Valentine, chairman of the Utah State Tax Commission, after the ruling was issued on Thursday and that he believes the Legislature would wait until its regular session next year to adjust the tax code as a result of the ruling.
The ruling excited Jens Nielsen, owner of Pictureline in Salt Lake City, who said customers flocked to online retailers knowing they’d save money if the business didn’t collect sales tax.
“We would be twice if not three times as large of a company in Salt Lake if there was a fair and even sales tax,” Nielsen said. “Obviously I’m excited about it because we’re going to grow from this.”
And while businesses will watch for changes at the state level, at least one online behemoth in Utah is calling for Congress to change the tax code.
“Though the impact of the court’s ruling today will be clarified by further proceedings in the lower court, we are prepared to comply with any outcome,” Jonathan Johnson, president of Overstock.com subsidiary Medici Ventures, said in a written statement.
Overstock and Johnson have been among the most vocal opponents of online sales taxes.
Still, Johnson said, “The decision will have no appreciable impact on our business.”
The company’s stock fell 7 percent shortly after the court handed down its 5-4 ruling.
“Unless Congress responds, the Court’s ruling may remove key entrepreneurial opportunities before they even get out of the heads of the inventors,” Johnson added.