US Supreme Court ends internet's escape from state sales tax

Ruben Fields
June 22, 2018

The U.S. Supreme Court's sales-tax ruling Thursday could finally correct a fundamental unfairness local retailers and state governments have groused about since the dawn of e-commerce.

The Supreme Court overrules the Quill case, which previously set the precedent for collecting sales tax from online sellers.

Amazon has always been the "poster child" for this problem/opportunity as they have been the dominant online-only retailer for some time. Customers bore the responsibility for paying those taxes, but many were unaware of the responsibility, and states felt they were losing out on potentially billions in lost revenue. Amazon stock is down over 1.2%.

The US Supreme Court ruled Thursday that American states had the right to tax internet sales of goods and services. (The most recent, Quill v North Dakota, was in 1992.) The court also split in a highly unusual way. Typically states would focus their efforts on online vendors and not the customers, but with today's ruling, it becomes moot. The court justices include: (seated, from left): Associate Justices Ruth Bader Ginsburg and Anthony M. Kennedy, Chief Justice of the U.S. John G. Roberts, Associate Justices Clarence Thomas and Stephen Breyer. Roberts argued that it should be up to Congress to make a change like this. Amazon declined to comment on the Supreme Court ruling Thursday. Some of this is practical: Even internet sales require some physical infrastructure like warehouses, so the biggest companies actually meet the physical presence standard in a growing number of states and cities. Plus, at least some of that growth represents entirely new sales that never would have occurred in an offline world.

Last year, states could have collected as much as $13.4 billion in additional online sales taxes, according to the General Accountability Office. That means different rates, varying definitions of products, and a variety of exemptions. When it comes to online shopping, this resulted in the states missing out on a lot of tax when something was purchased from an out-of-state company. Now, rivals will be charging sales tax where they hadn't before.

The issue of no e-commerce states sales tax is particularly bad in states that do not have income tax and are not situated in economic hotspots or with great transportation options - like South Dakota.

It is true that some states have tried to simplify their sales taxes to reduce compliance costs. And there are consulting firms that can help companies navigate this minefield.

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But there can be no doubt that this ruling means a higher cost of doing business.

But for large retail chains that operate stores, the benefits are likely to be limited, according to tax and retail consultants.

But many online sellers, such as Etsy or EBay, that serve as a third party portal for thousands of small homegrown businesses that do not pay sales taxes, point to confusing tax rules that could expose them to costly audits for any revenue shortfall.

"It's clear that none of those judges are from a low-tax state like New Hampshire because if they were, they'd know how outrageous the decision is", Gov. Chris Sununu told reporters.

In other ways, Washington and South Dakota have similar online sales-tax regimes. State lawmakers were confident enough that the Supreme Court ruling would be favorable to put that number in the current two-year budget.

"Any adjustment of those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress", Roberts added.

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