SCOTUS Says States Can Force Online Retailers to Collect Taxes

supreme courts rules online sales tax forcedThe U.S. Supreme Court on Thursday issued a landmark ruling that could transform online commerce.

In a 5-to-4 ruling in the South Dakota vs. Wayfair case, the high court ruled that Internet retailers can be required to collect sales taxes in states where they have no physical presence, or nexus.

The decision overrules the 1992 Quill Corp. v. North Dakota. That decision stated that catalog retailer Quill did not have to collect sales tax in North Dakota because it had no physical presence in the state.

The Opinion

The latest court decision states that the Quill decision was “unsound and incorrect.” And that it doesn’t take into account the current issues.

“Each year the physical presence test becomes further removed from economic reality and results in significant revenue losses to the States,” wrote Justice Kennedy in the majority decision. “These critiques underscore that the physical presence rule, both as first formulated and as applied today, is an incorrect interpretation of the commerce clause.”

According to Justice Kennedy, the physical presence test was estimated to cost the states between $8 billion and $33 billion annually. That tax revenue is needed for education, healthcare and infrastructure. See the full U.S. Supreme Court opinion here.

The Impact

Proponents claim small retail brick-and-mortar businesses have been harmed because online merchants offer a price advantage.

However, for their part, many online retailers claim that the burden of collecting sales tax would devastate their business. They would need to purchase expensive software to deal with the more than 10,000 US tax jurisdictions. In addition, online sellers say new sales tax laws run directly counter to the Commerce Clause of the U.S. Constitution, which prohibits states from discriminating against interstate commerce.

Chief Justice John Roberts dissented, and said the decision should be left to Congress. “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,” Roberts said. “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.”

Meanwhile, 16 states already have laws similar to South Dakota’s. That could enable them to require tax collection by internet retailers in the coming months. Mores states could follow quickly. But still other states would have to revise their tax laws.

Winners and Losers

Many say that Amazon is the biggest winner. That’s because the ruling will greatly affect Amazon’s first-party competitors, such as Wayfair and Newegg. Amazon already collects a sales tax in every state that has sales tax

Additionally, small online-only businesses and mom-and-pop e-marketers will also be dramatically impacted. It could prove very expensive for small businesses forced to collect taxes for thousands of separate state and local jurisdictions. Some fear that complexity could stymie innovation and entrepreneurship.