The Wayfair decision and California
I used to tell my friends and colleagues to be sure to check out the Lord & Taylor website before they buy an outfit. Lord & Taylor doesn’t have operations in California, so the same Calvin Klein dress would be tax-free at Lord & Taylor, but at the Macy’s website it would be taxed as much as 10.25 percent. So long as a business doesn’t have operations in a state, in-state consumers don’t pay taxes when they buy their products online.
That’s all changed with the U.S. Supreme Court’s Wayfair decision. Businesses, large and small, no matter where they’re based, now have to charge the state sales tax rate where the buyer lives.
Free marketeers are divided on the issue. One side claims that Wayfair levels the playing field between internet-only sellers and brick-and-mortar retailers. The other side says that Wayfair does away with the competitive system for people who buy and sell online.
I feel sorry for the rest of America because California now gets to ship its high sales tax to the rest of the country.
Jessica Melugin of the Competitive Enterprise Institute believes that Wayfair hurts online entrepreneurs most of all: “Now that states can export their tax policies and reach outside their borders to tax businesses in other states, that beneficial rivalry among states is diminished. That puts both the online buyer and the entrepreneur at a disadvantage. It is the online equivalent of the gas station attendant calculating your tax based on where you live, not where you are pumping gas. This means consumers can no longer vote with their wallets by taking their online purchases elsewhere.”
Of course, we’re not hearing any complaints from California’s politicians and bureaucrats. Wayfair is a boon to state coffers. Before the Supreme Court’s ruling, the Sacramento Bee reported that California already was trying to wring more taxes out of online retailers. Last fall, California’s Dept. of Tax and Fee Administration sent letters to more than 2,500 online retailers with out-of-state addresses informing them that they appeared to owe sales tax in the state. Ed Maduras, the tax department’s director, estimates that the state had been missing out on about $1.8 billion in revenue from internet retailers.
But before California can start collecting taxes, it still needs to iron out the details. To be within the constitutional bounds of Wayfair, the state must comply with a checklist of items that includes “a simplified tax structure” and software to help online sellers figure out the appropriate tax rates. This is going to be complicated because the state has 323 sales tax jurisdictions.
Meantime, Oregon, which doesn’t have a sales tax, offers wonderful wines from the Willamette Valley and holds the spectacular Ashland Shakespeare Festival – about a six-hour drive from San Francisco, PRI’s HQ. On my next vacation to Oregon, my souvenir list could include a new computer, a stereo system, and a bike for my niece. The possibilities will only be limited by the size of the truck I’m going to rent.
Rowena Itchon is senior vice president of the Pacific Research Institute.