Supreme Court rules states can require online sellers to collect sales tax

The Supreme Court on Thursday upheld a South Dakota law requiring certain out-of-state retailers, including those that operate remotely online, to collect its sales tax.

In a 5-4 ruling, the court overturned a 1992 court precedent barring states from requiring businesses that have no physical presence in the state to collect their sales taxes.

Delivering the opinion of the court, Justice Anthony Kennedy said the physical presence rule in that former case, known as Quill Corp. v. North Dakota, is unsound and incorrect.

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Kennedy said Quill created a tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a state’s consumers — something, he said, that has become easier and more prevalent as technology has advanced.

“Between targeted advertising and instant access to most consumers via any internet-enabled device, ‘a business may be present in a state in a meaningful way without’ that presence ‘being physical in the traditional sense of the term,” he said.

“A virtual showroom can show far more inventory, in far more detail, and with greater opportunities for consumer and seller interaction than might be possible for local stores.”

The case centered on South Dakota’s 2016 law that requires out-of-state online sellers to collect the state’s sales taxes if the companies have more than $100,000 in annual sales of products to South Dakota residents or more than 200 separate transactions for the delivery of good and services to state residents.

Major online retailers Wayfair Inc., Overstock.com and Newegg Inc. challenged the constitutionality of the law after South Dakota asked a court to force the retailers to register for licenses to collect and remit sales tax.

The retailers argued that overturning the ruling would cause chaos for businesses as thousands of different tax jurisdictions passed their own online sales tax laws.

The state, however, argued Quill was problematic because it put brick-and-mortar businesses at a disadvantage compared to online businesses and cost states valuable tax revenue.

Kennedy agreed. He said the Commerce Clause of the Constitution was intended to put businesses on an even playing field and the rule in Quill undermined that effort.

“Quill puts both local businesses and many interstate business with physical presence at a competitive disadvantage relative to remote sellers,” he said.

Chief Justice John Roberts and Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan dissented from the court’s ruling.

Roberts said in his dissent, which the other justices joined, that e-commerce has grown into a significant and vibrant part of the national economy against the backdrop of established rules, including the physical presence rule.

“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 said.

President Trump applauded the ruling in a Thursday afternoon tweet:

Big Supreme Court win on internet sales tax – about time! Big victory for fairness and for our country. Great victory for consumers and retailers.

— Donald J. Trump (@realDonaldTrump) June 21, 2018

Lawmakers in both parties have been split on the issue for a number of years.

The Senate passed a bipartisan online sales tax bill in 2013 that was championed by Sens. Lamar Alexander (R-Tenn.) and Heidi Heitkamp (D-N.D.), but it stalled in the House because House Judiciary Committee Chairman Bob Goodlatte (R-Va.) had concerns with it.

Alexander said the court correctly left to states decisions about who should pay state sales and use taxes, and how they should be collected.

“It stops the federal government from forcing states to prefer out-of-state businesses over Main Street,” he said in a statement. “There still may be a need for Congress to act to adopt the simplified collection of sales tax procedures in the Marketplace Fairness Act that 69 United States senators voted for in 2013.”

Meanwhile, Sen. Ron Wyden (D-Ore.), ranking member on the Senate Finance Committee, slammed the decision as “catastrophic.”

“The Supreme Court has given the green light for states to establish an underground, nationwide, privatized tax-collecting bureaucracy,” Wyden, whose state does not have a sales tax, said in a statement. “With this ruling sellers from other countries won’t have to collect tax, which will give them a big leg up over American producers and sellers.”

Wayfair said in a statement it has long supported a legislative solution that would level the playing field for brick and mortar and online retailers.

“While we believe the court was not the ideal venue for creating this level playing field, we expect that today’s decision will bring clarity and certainty to this issue,” the company said.

Wayfair said it already collects and remits sales tax on approximately 80 percent of its orders in the United States and does not expect Wednesday’sdecision to have a noticeable impact on its operations.

Online retailers have argued the physical presence rule has helped small businesses grow over the Internet and without it they’ll be burdened by having to collect sales tax nationwide.

But Kennedy said affordable software may help small businesses deal with those challenges of collecting sales tax in multiple jurisdictions.

“And in all events, Congress may legislate to address these problems if it deems it necessary and fit to do so,” he said.

Thursday’s ruling, however, was was cheered by some retail and government groups.

“Today’s decision by the U.S. Supreme Court is a victory for Main Street America,” said National Conference of State Legislatures President Deb Peters, who also serves as a South Dakota state lawmaker.

“Brick and mortar stores will no longer be penalized for collecting the tax revenues that fund our schools, infrastructure, and the vital public services that state and local governments provide. For states, today is just the beginning.”

National Retail Federation President and CEO Matthew Shay praised the ruling and said Congress should now take action.

“Congress must now follow the court’s lead and pass legislation implementing uniform national rules that provide consistency and clarity for retailers across the country,” he said.

Those who supported Wayfair in the case, however, said they were disappointed with the ruling and will seek congressional action.

“Congress must now act to contain the fallout of this case,” said Andrew Moylan, executive vice president of the National Taxpayers Union Foundation.

Updated: 4:51 p.m.