Supreme Court rules states can require online retailers to charge sales tax

The Supreme Court ruled that states can require online retailers to charge a sales tax even if the company does not have a physical presence in that state. The high court voted 5-4 in the decision.


The 5-4 decision overturns a 1992 Supreme Court precedent that effectively barred states from collecting such taxes, and could leave consumers paying more for online purchases as cash-strapped states tap a rich vein of new revenue.

In making their decision, justices ruled that South Dakota can collect sales taxes from online retailers like Wayfair, which was sued by the state. In doing so, the court reversed a 1992 ruling that allowed states to levy taxes only on those businesses with a brick-and-mortar location within the state. The court said that law effectively incentivized businesses to "avoid physical presence" in states and led to "a judicially created tax shelter." Ultimately, the justices deemed the current law outdated.

"The Internet's prevalence and power have changed the dynamics of the national economy," Justice Anthony Kennedy wrote in the majority opinion. "The expansion of e-commerce has also increased the revenue shortfall faced by States seeking to collect their sales and use taxes."

Sucharita Kodali, a retail analyst with Forrester, called the ruling "bad news" for thousands of major online retailers. "Now those companies have to assess taxes on customers or they get sued. For products like furniture, jewelry, electronics, people will likely start to shop local again," she said.

South Dakota's law applies only to those businesses with more than $100,000 in sales, or at least 200 transactions, in the state each year. Thirty-one states already levy online sales taxes of some sort. It remains unclear whether Thursday's ruling will prompt them to revise their laws, or encourage the remaining 19 states to impose taxes on retailers even smaller than those affected by South Dakota's law.

State and local governments had grown increasingly agitated as sales from brick and mortar retailers gave way to online retail, which now comprises approximately 9.5% of the dollar value of total purchases.

Prohibitions against collecting sales taxes from online retailers cost states as much as $13.4 billion last year, according to the Government Accountability Office. Although the IRS requires consumers to tally their purchases and pay all applicable taxes with their regular filing, few people do.

Many large online retailers, including Amazon and Wal-Mart, already collect sales taxes because they have a large enough physical presence in each state to qualify as taxable by states. But plenty of smaller players, such as home furnishings websites Overstock.com and Wayfair, don't have widespread enough operations to be subject to state taxing authority, giving them a substantial price advantage over traditional brick and mortar businesses.

It's unlikely the court ruling will halt the rapid ascent of ecommerce, which was fueled in part by the 1992 decision.

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