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Supreme Court allows states to collect sales taxes on more online transactions

Richard Wolf, USA TODAY Published 10:23 a.m. ET June 21, 2018 | Updated 10:56 a.m. ET June 21, 2018
Supreme Court online sales tax

WASHINGTON -- A closely divided Supreme Court upended the nation's Internet marketplace Thursday, ruling that states can collect sales taxes from most online retailers.

The decision, which overturns an earlier Supreme Court precedent, will boost state revenues at the expense of consumers and sellers who have avoided sales taxes in the past.

Justice Anthony Kennedy wrote the 5-4 decision, joined by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito and Neil Gorsuch. Chief Justice John Roberts dissented, saying the decision should be left to Congress, and was joined by Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan.

Faced with a South Dakota law that exempted online retailers with less than $100,000 in annual sales or 200 annual transactions in the state, the justices nevertheless opened the door to states that may want to collect sales taxes from smaller sellers. Kennedy said Congress could step in to set limits.

"If some small businesses with only de minimus contacts seek relief from collection systems thought to be a burden, those entities may still do so under other theories," Kennedy said. But the potential for problems, he said, "cannot justify retaining this artificial, anachronistic rule that deprives states of vast revenues from major businesses."

The high court ruled in 1967 and again in 1992 that companies without a physical presence in a state did not have to collect sales taxes. But those rulings applied mostly to mail-order catalog companies. In 1992, Amazon had not yet begun selling books out of Jeff Bezos' garage.

In its challenge, South Dakota noted that "times have changed," with online sales growing at four times the rate of total retail sales. As a result, state and local governments in 45 states lose billions of dollars annually in taxes. (Alaska, Delaware, Montana, New Hampshire and Oregon do not have sales taxes.)

In response, online sellers Wayfair, Overstock.com and Newegg, said online retailers could face some 12,000 local tax jurisdictions if the Supreme Court sided with the states. They warned of economic chaos -- at least until Congress steps in.

In his dissent, Roberts warned that the decision could detract from E-commerce's "significant and vibrant part of our national economy."

"This court should not act on this important question of current economic policy, solely to expiate a mistake it made over 50 years ago," Roberts said.

When the court ruled in 1967 and 1992 that Illinois and North Dakota could not squeeze sales taxes from sellers with no presence in those states, there wasn't nearly as much at stake. Now consumers do nearly 10% of their shopping online, a share that will grow exponentially in the future.

Congress protected those Internet sellers in 1998 legislation that has since been made permanent. Then in 2000, a national commission urged states to simplify their tax systems as a precursor to taxing remote sellers. Twenty-four states eventually did so, but the nation's largest states, with 70% of the U.S. population, did not.

Stymied by the Supreme Court rulings and the Internet Tax Freedom Act, states have done their best to collect taxes on residents' out-of-state purchases. That has created a patchwork of laws. More than 20 states define a seller's physical presence as including any affiliated website. Ten states require out-of-state sellers to notify buyers and inform states of the unpaid sales taxes.

The Supreme Court in 2015 unanimously upheld Colorado's law requiring those notices and reports.

Most of the top 20 online sellers already collect taxes in nearly all states, either because they have added local showrooms or warehouses, or because of state laws. The top 100 retail sellers remit about 90% of the taxes owed.

But many smaller online retailers are women, minorities, veterans and people with disabilities who have taken advantage of the protections granted by the Supreme Court and Congress over the years.

The typical retailer on eBay sells between $10,000 and $500,000 annually, with customers in more than 300 tax jurisdictions. Etsy's sellers are even smaller: Nearly eight in 10 are sole proprietors, nearly nine in 10 are women, and nearly all are based in homes. Average annual sales: $1,710.

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