The U.S. Supreme Court today ruled that states can collect taxes on internet sales. The highly-anticipated opinion was delivered on a 5-4 basis, confirming speculation that the court was divided on the issue.
The Supreme Court handed states broad authority Thursday to require online retailers to collect sales taxes, overturning a pre-Internet court precedent that had effectively exempted many merchants from collection duties.
The court, in a 5-4 decision written by Justice Anthony Kennedy, ruled that states can require internet merchants to collect the taxes even if the merchant has no physical presence in the state.
The court cited studies suggesting that the current rule costs states up to $33.9 billion a year in uncollected sales taxes.
Justice Kennedy said the old rule “limited states’ ability to seek long-term prosperity and has prevented market participants from competing on an even playing field.”
The ruling likely will spell the end of an era in which consumers could save on taxes by purchasing goods online instead of from local merchants.
All eyes will now turn to Congress and the states. Congress has been stymied between alternate versions of federal solutions: the Remote Transactions Parity Act (RTPA) or Marketplace Fairness Act (MFA), which lets states collect if they agree to simplify their sales taxes, and a proposal from retiring Rep. Bob Goodlatte (R-VA) that would make the sales tax a business obligation rather than a consumer obligation, and have it collected based on the tax rate where the company is located but send the revenue to the jurisdiction where the customer is located. RTPA and MFA are more workable and more likely to pass, but Goodlatte controls what makes it to the House floor, so nothing has happened. Maybe today’s decision will change that.
In the states, a reminder, 31 states currently have laws taxing internet sales. Today’s decision will certainly change how states look at these laws but we may see states trying to see if their versions could survive even if they are less simplified and direct than South Dakota’s law. This ruling is not a blank check for states. The Court specifically observed that South Dakota’s law, and its tax laws generally, minimizes the burden on interstate commerce. Other states should craft their laws accordingly.
In addition to being a win for states, the ruling is also a win for large retailers, who argued the physical presence rule was unfair. Retailers including Apple, Macy’s, Target and Walmart, which have brick-and-mortar stores nationwide, generally collect sales tax from their customers who buy online. That’s because they typically have a physical store in whatever state the purchase is being shipped to. Amazon.com, with its network of warehouses, also collects sales tax in every state that charges it, though third party sellers who use the site to sell goods don’t have to.
Although it is the poster child for big e-commerce, Amazon wasn’t involved in the lawsuit and the immediate decision doesn’t affect the company dramatically. But the resulting legislative fallout could have an impact. Today, the retail giant collects taxes in every state that has a sales tax.
For the many third-party sellers on Amazon’s platform, it’s more of a gray area. Prior to the ruling, sellers were responsible for collecting sales taxes if they had a presence in the state. But some states, including Washington, have recently passed marketplace bills which force the company that provides the platform for sellers — such as Amazon, Etsy and, eBay — to collect sales tax rather than the asking the seller to do so.
The Geek Wire story adds this comment from a local member of Congress.
Rep. Suzan DelBene — representing Amazon’s home state of Washington — cheered the ruling in a statement.
“As in so many other areas, technology has evolved faster than the law and left us with at times bizarre, unfair results,” she said. “This is a big win for local brick-and-mortar retailers, who will now get a chance to compete on a level playing field with out-of-state internet companies that have maintained an unfair edge by not collecting sales taxes.”
David Schumacher, director of the Office of Financial Management in Washington state, described the possibility of capturing more taxes from out-of-state, online retailers as “closing a loophole rather than adding a new tax” and said it would “definitely be a good thing.”
Sales tax collections are especially important in Washington, one of seven states that does not have an individual income tax. But Schumacher said that, with Amazon located there, the state has been collecting sizable online sales tax revenues for some time.
A big deal.