Supreme Court: States can require e-retailers to collect state sales tax

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Supreme Court: States can require e-retailers to collect state sales tax

By David Salazar - 06/21/2018
The Supreme Court dealt a blow to e-retailers Thursday with its ruling in South Dakota v. Wayfair, Inc. The court upheld a 2016 South Dakota law that required e-merchants — even those without physical operations in-state — to collect sales tax “as if the seller had a physical presence in the state,” paving the way for similar legislation in other states.

The case ended up at the Supreme Court after South Dakota filed suit against the online retailer, as well as Overstock.com and Newegg, after they did not collect its state sales tax despite making in-state sales that exceeded the $100,000 or 200 transaction mark that required compliance. Both a trial court and the South Dakota Supreme Court both held that the law couldn’t be enforced due to prior cases that established a controlling precedent, most recently held in Quill Corp. v. North Dakota, which limited tax collection responsibilities to companies that had a physical presence in a taxing state.

However, the Supreme Court’s ruling Thursday overturned that ruling, noting that the physical presence rule created certain market distortions to the point that 41 states, two territories and the District of Columbia have asked the court to reject it.

“Rejecting the physical presence rule is necessary to ensure that artificial competitive advantages are not created by this Court’s precedents,” Justice Anthony Kennedy wrote in the majority ruling. “The physical presence rule has long been criticized as giving out-of-state sellers an advantage,” the majority opinion said. Each year, it becomes further removed from economic reality and results in significant revenue losses to the States.”

Kennedy’s opinion was joined by Justices Ruth Bader Ginsburg, Samuel Alito and Neil Gorsuch, with Gorsuch also filing a concurring opinion, as did Justice Clarence Thomas. Chief Justice John Roberts filed a dissent, on which he was joined by Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan. The dissenting opinion noted that the role of deciding the question of taxes on e-retailers was best 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 wrote. “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. The Court should not act on this important question of current economic policy, solely to expiate a mistake it made over 50 years ago.”

The decision has been hailed by retail organizations, in particular the National Retail Federation, which saw the ruling as a leveling of the playing field between online merchants and brick-and-mortar operators.

“Retailers have been waiting for this day for more than two decades,” NRF president and CEO Matthew Shay said. “The retail industry is changing, and the Supreme Court has acted correctly in recognizing that it’s time for outdated sales tax policies to change as well. This ruling clears the way for a fair and level playing field where all retailers compete under the same sales tax rules whether they sell merchandise online, in-store or both.”

Who’s the winner in the decision? Read DSN editor in chief Seth Mendelson’s take.