North America

Supreme Court lets states force online retailers to collect sales tax

Sales Tax
June 22, 2018

Source: Reuters

Written By: Lawrence Hurley

States may force online retailers to collect potentially billions of dollars in sales taxes, the U.S. Supreme Court said in a major ruling on Thursday that undercut an advantage many e-commerce companies have enjoyed over brick-and-mortar rivals.

In a 5-4 ruling reviving a South Dakota law challenged by Wayfair Inc, Inc and Newegg Inc, the justices overturned a 1992 high court precedent that had barred states from requiring businesses with no “physical presence” there, like out-of-state online retailers, to collect sales taxes.

Shares of online retailers fell following the ruling, which opened the door to a new revenue stream to fill state coffers – up to $13 billion annually, according to a federal report.

“Big Supreme Court win on internet sales tax – about time!” President Donald Trump, who has bashed online retail powerhouse Inc and whose administration backed South Dakota, said on Twitter. “Big victory for fairness and for our country. Great victory for consumers and retailers.”

The ruling likely will result in many consumers paying more for online purchases. Because many e-commerce companies do not collect state sales taxes on purchases, they have had an advantage over brick-and-mortar businesses that do collect it.

South Dakota’s law, enacted in 2016, focused on larger out-of-state e-commerce companies, requiring them to collect sales tax if they amass $100,000 in sales or 200 separate transactions. Other states are now expected to pursue sales tax on out-of-state online purchases, with more legal fights likely. Forty-five of the 50 states have sales taxes.

Overstock closed down 7.2 percent and Wayfair dropped 1.6 percent, though both said the ruling would have no major impact on their businesses. Amazon shares closed down 1.1 percent.

Amazon, which was not involved in the Supreme Court case, collects sales taxes on direct purchases from its site but does not typically collect taxes for merchandise sold on its platform by third-party vendors, representing about half of total sales. The ruling means states may now seek to tax more of those sales, Moody’s analyst Charlie O’Shea said.

Trump has blasted Amazon CEO Jeff Bezos, who also owns the Washington Post, a newspaper that the Republican president has disparaged for its coverage of him.

Liberal Ruth Bader Ginsburg joined four conservative justices in the majority in the ruling authored by Justice Anthony Kennedy, while conservative Chief Justice John Roberts joined the court’s three other liberals in dissent.

“Rejecting the physical presence rule is necessary to ensure that artificial competitive advantages are not created by this court’s precedents,” Kennedy said.

In the digital era, the costs of complying with different tax regimes “are largely unrelated to whether a company happens to have a physical presence in a state,” Kennedy wrote.

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