States Can Force Online Retailers To Collect Sales Tax, Supreme Court Rules

A state may require online retailers to collect sales tax, even if the retailers lack brick-and-mortar stores in the state, the Supreme Court said in a 5-4 ruling issued on Thursday.

The decision overruled a 26-year-old case that tied states' ability to require retailers to collect tax to their physical presence in the state. Writing for the majority, Justice Anthony Kennedy suggested that the prior decision, which involved the catalog company Quill Corp., didn't make sense given the realities of online commerce.

"The Internet’s prevalence and power have changed the dynamics of the national economy," Kennedy wrote, adding that e-commerce sales were estimated to total $453.5 billion last year. In 1992, when the Supreme Court ruled in the Quill case, mail-order sales totaled an estimated $180 billion, Kennedy said.

"Quill puts both local businesses and many interstate businesses with physical presence at a competitive disadvantage to remote sellers," Kennedy wrote. "Worse still, the rule produces an incentive to avoid physical presence in multiple states."

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Thursday's decision stemmed from a 2016 South Dakota law requiring out-of-state retailers with more than $100,000 in annual sales to South Dakota residents, or more than 200 transactions per year with South Dakota customers, to report and collect sales tax. Online retailers Wayfair, Overstock and NewEgg challenged the measure, arguing that it was invalid due to the Supreme Court's 1992 decision involving Quill.

South Dakota's highest court sided with the online retailers and invalidated the law. The state then asked the Supreme Court to revive the measure.

South Dakota argued to the court that online retailers' failure to collect tax harms state and local governments, who increasingly lose out on revenue as retail sales continue to migrate online.

Consumers are supposed to pay sales tax even if retailers don't collect it, but many consumers fail to do so. The opinion says that states across the country lose an estimated $8 billion to $13 billion a year in revenue due to consumers' failure to pay tax on online purchases.

Kennedy wrote that the online retailers who challenged the South Dakota law were essentially asking the court "to retain a rule that allows their customers to escape payment of sales taxes."

Justice John Roberts, who authored the dissent, wrote that Thursday's decision is likely to harm small retailers, and that Congress should set policies about sales tax.

"E-commerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical-presence rule," he wrote. "Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress."

He noted that more than 10,000 jurisdictions currently impose sales tax, at different rates and with different rules. "A few examples: New Jersey knitters pay sales tax on yarn purchased for art projects, but not on yarn earmarked for sweaters," he wrote. "Illinois categorizes Twix and Snickers bars -- chocolate-and-caramel confections usually displayed side-by-side in the candy aisle -- as food and candy, respectively (Twix have flour; Snickers don’t), and taxes them differently."

Roberts added that the compliance burden  "will fall disproportionately on small businesses."

The legal battle over South Dakota's law drew the attention of numerous outside groups, including the American Booksellers Association, which supported the law, and NetChoice, which opposed it.

The American Booksellers Association argued in a friend-of-the-court brief that the court's 1992 decision threatens independent bookstores. But NetChoice -- which counts eBay, Google, and Facebook among its members -- argued that requiring retailers to collect tax in every state and local jurisdiction in the U.S. would harm small companies.

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