Monday, April 16, 2018

Taxing Internet Sales Isn't That Good A Deal For South Dakota

     The internet sales tax case that South Dakota Attorney General Marty Jackley brings to the U.S. Supreme Court (SCOTUS) this week will be a game-changer if Jackley prevails.  As things stand now, many online retailers charge no sales tax on purchases made by South Dakotans, resulting in a loss of $50 million a year in revenues to the state. This has been a two-pronged dilemma because even as the State of South Dakota is missing out on those revenues, our in-state brick-and-mortar retailers have to compete against their internet-only counterparts at a built-in disadvantage. 
I'm Dubious

     That sounds like a losing proposition, all right, but my problem with the AG's effort is that I'm dubious about South Dakota coming  out a winner if SCOTUS sees things Jackley's way. 
Jackley says that "we're fighting for Main Street businesses, we're fighting to give those Main Street businesses that even playing field."  Considering that South Dakota in 2017 had retail taxable sales of $11 billion, the state is giving up a 9% slice of business to the internet, about $1 billion/year, extrapolating from the revenue loss claimed by the State.  Nobody knows how much of that $1 billion in internet sales would be recovered if South Dakotans shopped locally based on the sales tax differential being eliminated.  A 2017 study done by accounting industry giant KPMG, finds that online shoppers list convenience, ability to shop 24/7, ease of price-comparison, and better prices  among their top four reasons for buying on the internet.  No doubt the sales tax savings plays into pricing decisions, but other reasons are also powerful drivers when it comes to consumer purchases.  I think it's reasonable to figure that adding sales taxes to online sales will redirect some business to South Dakota retailers, but a substantial amount of online sales will remain a significant part of consumer behavior just the same. It's probably a pipe-dream for Jackley and the rest of our government officials to contemplate a significant surge in local retail sales if SCOTUS sees things our way on this.  Online shopping is here to stay, and in a big way.
     More problematic is the effect that a successful outcome in our lawsuit will have on start-up ventures in South Dakota.  Every retailer with online aspirations will be forced to deal with the myriad of state and local tax issues confronting internet purchases. The expenses for potentially costly audits and sophisticated software that's able to navigate through this jungle is so high that Andy Pincus, speaking on behalf of eBay in the case, says "for small businesses on tight margins, these costs are going to be fatal in many cases."  I question whether South Dakota's small business culture will be able to evolve and grow in an environment that favors bigger and better capitalized competitors in larger states.
     Meantime, I wonder how Marty Jackley and his campaign for Governor in the coming GOP primary can square this lawsuit with his pledge to keep taxes low.  Stripped of all the "level playing field" rhetoric, Jackley's proposing a tax increase on South Dakotans.  The scramble for more revenues for our cash-strapped state has missed too many potential consequences that in the short-run will cost residents money and in the long run leave us limping in the competition for sales in the modern retail environment.


  1. In the context of an editorial in USA Today, I had an exchange with a friend over the issue you raise. The response: "All they need to do is to run the business through Etsy which will add sales tax, easy peasy, and will also handle all the transactions for them. I have a friend who makes a living off of internet sales, and that's what she does."

    I have no idea what, if anything, Etsy charges, but I'm dead certain that the items I buy on line are either unavailable, or higher priced, than what's on offer locally. I check prices, and sales taxes is rarely the determining factor as to whether I leave home.

  2. Just checked the Etsy website and it looks like state sales tax collections are relatively quick and easy to set up, but local taxes seem quite a bit more complex and expect the user to do all the research, which must be a huge and complicated task, if even possible.

    1. Thanks John. I suspicioned it wouldn't be easy. I still wonder how the Roberts' Court will get around the Commerce Clause. But I'm only an egg.

  3. Assuming they win the case, what will the new Governor do with the extra 50 million tax payer's dollars? We've been told that sales tax is good because tourists pay some and that keeps SD taxes low. This change will only apply to people who live here. I agree that sales tax isn't going to change my buying habits but removing 50 million from the SD economy has to leave a mark.


  4. I was remiss in not calling attention to the fact that $50 million would come out of private sector circulation and go directly to state government. Thanks for making note of it.

  5. As it stands, the Partridge amendment makes the internet sales tax revenue neutral up to 100 million - it makes the 1/2 cent tax increase go away. After 100 million it will be gravy for the State ( IMO it wont stay this way )