Indiana makes moves to force you to pay online sales tax

As online sales continue to rise and brick-and-mortar retailers suffer the consequences, there’s another surprising loser: states.

A 25-year-old Supreme Court case — decided even before the birth of the largest e-commerce company, Amazon — prohibits states from collecting sales tax from businesses unless they have a physical presence in the state.

Indiana lawmakers, however, passed a law this spring claiming the state has a right to collect sales taxes from those using only online transactions. If companies abide by the state law, it could mean Hoosiers will pay more sales taxes starting July 1.

But if companies don’t — which is likely — Indiana will find itself in a court battle.

“We anticipate further litigation and actually, we welcome the litigation,” said bill sponsor Sen. Brandt Hershman, R-Buck Creek.

For years, states have grappled with the 1992 Supreme Court case Quill Corp. v. North Dakota as online retailers started to dip into the revenue of traditional retailers.

Between the start of 2016 and 2017, e-commerce sales increased by 14.7 percent, while total retail only increased by 5.1 percent, according to the U.S. Department of Commerce. The impact is evident in the number of large retailers such as Sears and JCPenney that have announced they are closing stores.

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As a result, the state is losing some of its largest source of revenue: sales taxes. In 2016, more than 40 percent of the state's $18 billion revenue came from sales taxes. 

A study published by the Indiana Fiscal Policy Institute and Ball State
University estimated the state lost around $77 million in 2012 because Indiana cannot collect all online sales taxes, while a separate University of Tennessee study put that figure at $195 million for the same year. 

The Indiana Department of Revenue declined to release their current estimates, due to "imminent pending litigation."

The state is still able to collect some of its online sales taxes, through agreements with nearly 2,000 companies, including Amazon, which add state sales tax to purchases. But many others have refused to do so. 

By law, consumers are also supposed to pay that tax later themselves as a use tax, however Appropriations committee chair Luke Kenley, R-Noblesville, estimated less than 5 percent of Hoosiers remit that tax on their annual tax returns.

According to a fiscal analysis from the Legislative Services Agency, the state only made $2 million in use tax collected on tax returns. 

Congress has the authority to regulate interstate commerce, so it could pass legislation allowing for online sales taxes. For more than a decade groups, like the National Conference of State Legislatures have lobbied Congress for such a law — with little success. In 2013, the Senate passed the Marketplace Fairness Act, but the bill couldn’t get the support of the House.

A law was proposed in Congress this year that could still go somewhere, but many states have decided to take the matter into their own hands. 

Online giants Wayfair Inc., Overstock.com Inc. and Newegg Inc. are now suing South Dakota for its 2016 law that nearly mirrors the one passed in Indiana this spring.

Both the Indiana and South Dakota laws require online retailers that make 200 separate transactions or have sales exceeding $100,000 per year in the state to collect and remit the sales tax.

The case is now being debated in the top South Dakota court and could make its way to the U.S. Supreme Court.

Indiana lawmakers want the court to intercede in hopes that the it would affirm the state’s right to collect the tax.

“We’re pretty confident that we can win,” Kenley said.

Apart from his desire to build up the state’s revenues, Kenley also worried about the stores operating within Indiana that are required to collect the 7 percent sales tax, while online retailers with no physical presence in Indiana are not. After all, Indiana has the second-highest state sales tax in the U.S. 

“It’s becoming a bigger problem and a bigger issue of fairness,” Kenley said. “It’s kind of a big issue to our brick-and-mortar stores because they’re at a disadvantage here, and they do something for the state by operating in the state and employing people in the state.”

Those opposed to the online sales tax see it differently. NetChoice, a trade association of e-commerce businesses, argues adhering to the tax codes in every state and city would be "bureaucratic gymnastics."

The association is pushing for their own legislation protecting online-only companies from state taxes: the No Regulation without Representation Act of 2017. 

But Grant Monahan, the president of the Indiana Retail Council, said those who have a physical presence in the state are at a significant disadvantage. That should change, he argued.

"We know that retailing is tough and competitive, and that’s not going to change," Monahan said, "but it should be a level playing field when it comes to collecting and remitting sales tax."

Call IndyStar reporter Kaitlin L. Lange at (812) 549-1429. Follow her on Twitter: @kaitlin_lange.