If you buy something online from an out-of-state company, you’re supposed to pay the sales tax when you fill out your tax return.
While some residents do, most don’t. That costs Ohio between $288 million to $465 million in online sales last year, according to the U.S. Government Accountability Office.
But that system could change after a Thursday morning Supreme Court ruling opened the door for states like Ohio to start requiring companies to collect taxes for online sales.
Under the current system, out-of-state companies don’t collect sales taxes on goods sold online to Ohio customers. Residents are supposed to self-report what they owe on their tax return.
“There’s a voluntarily ‘declare the tax you didn’t pay on your Internet and other purchases.’ Well of course hardly anyone pays much attention to that,” said Zach Schiller, research director for Policy Matters Ohio, a left-leaning think tank.
For the state’s online sales tax system to change, Ohio lawmakers would still need to change the rules in reaction to the court decision.
“Today’s decision does not have an immediate, direct impact on Ohio. The Court ruled on the laws in another state; not on Ohio’s tax laws,” stated Gary Gudmundson, spokesman for the Ohio Department of Taxation.
“We anticipate that we’ll see some out-of-state retailers begin to voluntary charge and collect Ohio sales tax, but otherwise the sales tax rules and laws in Ohio will stay the same until the General Assembly decides whether or not to change them.”
The ruling doesn’t mean states adding new taxes, but instead allows states to better collect taxes than the current system where shoppers self report, Schiller said.
“It allows the state to receive the revenue that has been due all along,” he said.
The court ruling was praised by Gordon Gough, president and CEO of the Ohio Council of Retail Merchants.
“This has been an issue that we’ve been working on for over two decades,” he said.
There were two options to level the field — make everyone pay or eliminate sales tax online altogether. The latter wasn’t a responsible decision, said Gough.
The revenue states have lost has been a growing problem as e-commerce grows, with about 10 percent of all retail transactions taking place online in 2017.
“It’s about leveling the playing field and fair competition,” said Chris Kershner, Dayton Area Chamber of Commerce executive vice president. “When online retailers collect sales tax, it creates a more equitable market place for all retailers, brick and mortar and online.”
The winners in the situation are big retailers like Walmart or Amazon, who already charge sales tax on most transactions because they have physical locations in most states. The real changes will come for business that ship to many states but only have a physical location in one, like Bowlerstore.com.
Bowlerstore.com has sold bowling equipment online since Lori Davidson and her husband Dave started the company in Darke County in 2005. They’ve always charged Ohio customers sales tax, but they also ship their products across the world where they haven’t been required to charge the taxes.
Yet Lori Davidson agrees that e-business won’t take a hard hit because of the decision.
“People are still going to buy what they want online regardless of if they have sales tax or not,” she said. “I think it’s always a disappointment to see something else added to the bottom line dollar, but there’s not a whole lot you can do about it.”
Stores that aren’t as specialized as Bowlerstore.com might have more concern about the decision. Now they won’t have the tax-free leg up on brick-and-mortar businesses who sell similar products.
The new ruling stemmed from a 2016 South Dakota law challenging the supreme courts previous online sales tax rulings. The law required out-of-state sellers who do more than $100,000 of business in the state or more than 200 transactions annually with state residents to collect sales tax and turn it over to the state. The state conceded in court that it could only win if the Supreme Court threw out the physical presence rule.
The Trump administration urged justices to side with South Dakota.
$288 million to $465 million
Estimate of how much online sales tax Ohio missed out on in 2017 under current system.
Source: U.S. Government Accountability Office