Supreme Court Gives States OK to Collect Sales Taxes on Online Sales

Internet retailers who have been largely exempt from out-of-state sales taxes will now owe billions annually.
Supreme Court Gives States OK to Collect Sales Taxes on Online Sales
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The Supreme Court has handed state governments a multibillion dollar windfall by overturning two previous rulings from decades ago that made internet sales largely exempt from sales taxes.

The ruling in South Dakota v. Wayfair, Inc upheld a state law that made online sales subject the South Dakota sales tax “as if the seller had a physical presence in the State.” The law applies to any seller that delivered more than $100,000 of goods or services into the South Dakota or made more than 200 separate transactions in the state in a year. The phrasing of the South Dakota statute was intended to set in motion its challenge to ruling by the Supreme Court ruled in 1992 -- two years before the first documented online sale -- that mail order sales were not subject to sales tax unless the seller had a "substantial physical presence" in the state where the purchase was made.

Related: Your Ecommerce Business Might Owe a Ton of Taxes You Don't Know About

Sales taxes account for an average of 46 percent of state revenue, according to the National Association of State Legislatures. South Dakota contended it has lost $48 million and $58 million annually to untaxed internet sales. The ramifications nationally are big. In 2017 ecommerce accounted for 13 percent of total retail sales and 49 percent of the growth.

The majority opinion was written by Justice Anthony Kennedy and joined by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito and Neil Gorsuch. Chief Justice John Roberts in a dissenting opinion said Congress should decide the issue. Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan joined the dissent.

Kennedy, in the majority opinion, wrote that the requirement of a "physical presence" to collect sales taxes was questionable even in the previous rulings and "is a judicially created tax shelter for businesses that limit their physical presence in a State but sell their goods and services to the State’s consumers, something that has become easier and more prevalent as technology has advanced."

Predictably, the decision is being hailed in the 45 states that collect sales taxes but Senator Ron Wyden, a Democrat from Oregon which has no sales tax, vowed to overturn the decision with new federal legislation.

Related: Why Internet Sales Tax is Bad Public Policy (Opinion)

“The Supreme Court has given the green light for states to establish an underground, nationwide, privatized tax-collecting bureaucracy," said Wyden in a statement. "I’ll do everything I can as the top Democrat on the Finance Committee to protect Oregonians -- and small business everywhere -- from being harmed by this catastrophic decision.”

Many large online retailers already collect sales taxes but, with an estimated 12,000 juridisdictions collecting varying sales taxes, the ruling could prove burdensome to small online sellers. Kennedy, in his opinion, dismissed those concerns, noting the South Dakota law carved out exemptions for low-volume sellers and that the companies challenging the law "are large, national companies that undoubtedly maintain an extensive virtual presence (in South Dakota)."

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