Will an Upcoming Supreme Court Decision Hurt the Economy?

The Supreme Court will decide whether to end the ban on states charging sales taxes on goods sold via the internet from retailers without a nexus in the state.
April 16, 2018 • Commentary
This article appeared on The Weekly Standard on April 16, 2018.

On Tuesday the Supreme Court will hear arguments in South Dakota v. Wayfair,which will force it to decide whether to end the ban on states charging sales taxes on goods sold via the internet from retailers without a nexus in the state. Should it effectively reverse a pair of previous Supreme Court decisions and permit states to do such a thing, it will constitute a significant change in our economy—but those changes won’t include rescuing embattled terrestrial retailers or filling states’ coffers with new tax revenue.

The main outcome will be slower economic growth.

The Supreme Court’s 1992 ruling in Quill v. North Dakota imposed a prohibition on states taxing the sales of remote retailers that exists to this day. The Court found at the time that it was impossibly complex for a remote retailer to know or compute the sales tax owed in thousands of different jurisdictions, and determined that if a retailer had no operations–such as a store or warehouse—in a state, then it did not make sense for it to pay taxes on sales made in that state.

The timing of the Quill case proved to be propitious: Less than two years after its decision Jeff Bezos introduced Amazon to the world. Today, of course, internet retail is enormous, and many of the terrestrial retailers that are struggling these days blame the company for their woes.

The states have been enthusiastic in having the court—or Congress—end that ban as well: They have blamed the expansion of internet retail for everything from their budget woes to climate change.

However, the notion that states will reap a revenue bonanza by taxing remote retailers is as dubious as the Glengarry leads. Every estimate that has previously been made of the revenue to be gained from such a tax vastly overstated reality, simply because most sales on the internet are already taxed (roughly two thirds, according to a recent study) and internet sales still comprise a small fraction of all retail sales—roughly 11 percent in 2016.

The Government Accountability Office estimates that ending Quill would raise an additional $8 to $13 billion for the states, or roughly 1–2 percent of the $700 billion of revenue the states anticipate collecting in 2018. Or, put in a different context, it roughly amounts to Walmart’s annual tax bill.

And that revenue comes at a significant opportunity cost to the economy. A plethora of research over the last two decades has found that it has been the hyper‐​competitive retail economy of the U.S. that has driven much of the productivity gains that the country has achieved since the mid‐​1990s. Both Walmart and–next–Amazon have ruthlessly pursued methods to reduce costs and increase worker productivity, and they have forced their suppliers to follow suit.

Productivity growth is important because it ultimately determines a nation’s standard of living, economists believe, and the retail sector plays an outsized role in its determination. William Lewis, the founding director of the McKinsey Global Institute, and former Obama CEA chair Jason Furman have both concluded that the nation’s competitive retail sector distinguished us from most other developed countries, and that this is an important reason–if not the main reason–that we have had greater productivity growth the last three or four decades.

Right now, Amazon is winning that productivity race hands down–its sales per employee exceeds $100,000, or twice that of Walmart. It is likely that as Amazon expands its terrestrial offerings and Walmart beefs up its online presence that this gap will shrink, but no one thinks it will disappear anytime soon.

If Amazon can withstand any competitive threat from Walmart, Target, or other big‐​box retail stores, then who is the next retailer who has a chance of beating it at its own game? We can safely venture that it will originate as an internet retailer, much like Amazon did.

However, taxing remote retail constitutes a barrier to future internet retail startups. Amazon undoubtedly benefited in its early years from not having to pay sales taxes in most states when it was competing remotely from a relatively small number of distribution centers and faced more difficult shipping and return logistics, and that ultimately came to benefit consumers–that advantage helped Amazon to hasten the internet marketplace.

Today, Amazon now has a presence in all fifty states in the form of its logistics network and therefore pays sales taxes in each state that has one—to provide the level of service it feels compelled to offer in order to compete against Walmart and Target it has to have warehouses and stores and pickup facilities near its customers.

The retail sector of the economy has, of course, changed dramatically in the last quarter century and in ways that no one anticipated then, or even a decade later. Until the last decade or so retailers were, generally, either solely remote retailers or else sold their wares only via their stores. Today, almost all retail sales are completed by an entity that is an omnichannel retailer, with both an internet presence as well as one or more physical stores.

The notion—implicit in the plaintiffs’ argument—that there are distinct internet and distinct non‐​internet retailers does not at all reflect the reality today. Most existing internet‐​only retailers are small mom and pop businesses selling goods that aren’t readily found elsewhere–a chia pet in the shape of Jerry Garcia’s beard or vintage Buffalo Braves shirts, for instance. A sales tax on these operators reduces the breadth of goods available to consumers without increasing demand for anything from their terrestrial “competitors.”

And for all of the bluster and talk of Amazon acting like a monopoly, it is worth remembering that its annual sales are only one third that of Walmart and behind CVS as well, and it is unclear whether its retail operations—which it doesn’t break out from its other operations—have ever turned a profit for the company; its most lucrative division appears to be its cloud services.

The history of retail shows that a company can dominate the field for only a short period of time. Before Walmart and Amazon there was Sears, Kmart, JC Penney, Montgomery Ward, and Woolworths, each of which innovated the retail environment in some way and became the top dog in the market before being supplanted by a competitor. Today, these companies are defunct or nearly so.

It is a history that Bezos is keenly aware of: He constantly refers to his company being at Day One of its history, explaining that his goal is to forever maintain that same competitive culture so that it can resist the new competitors that will inevitably arise. It is a noble goal but an impossible one.

But one way Bezos can put off its future rivals is to make it more difficult for small companies to grow—and imposing a retail sales tax on even the smallest remote retailer presents a significant barrier for retail start ups. That is undoubtedly the reason why Amazon now advocates for a sales tax on all internet retail.

Imposing an internet sales tax on remote sales won’t make us like France, which carefully circumscribes the retailers’ hours, prices, number of sales, and other behaviors in order to keep at bay the nonexistent bogeyman of unfair competition, but it’s a step in that direction.

State governments with a fiscal problem—and there are many, despite the fact that we are in the ninth year of an economic expansion and unemployment rates are nearing record lows—agitate for the right to tax out of state retailers because they need to place blame somewhere besides their profligacy and inability to coherently govern. Taxing out‐​of‐​state retail sales won’t fix anything–and it will hurt the economy to boot.

Despite the ancient principle of stare decisis, the betting seems to be that this court will indeed rule with the plaintiffs and effectively overturn Quill. If so, the U.S. economy would be worse off for it in the long run.

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