Online retailers can be forced to collect tax, high court rules

THE SUPREME COURT ruled that states and local governments may start collecting billions of dollars in sales taxes from internet retailers. / BLOOMBERG FILE PHOTO/AL DRAGO

NEW YORK – The U.S. Supreme Court freed states and local governments to start collecting billions of dollars in sales taxes from internet retailers that don’t currently charge tax to their customers.

Siding with states and traditional retailers on a 5-4 vote Thursday, the court overturned a 1992 ruling that had made much of the internet a tax-free zone. That decision had shielded retailers from tax-collection duties if they didn’t have a physical presence in a state.

Writing for the court, Justice Anthony Kennedy said the 1992 ruling, which involved catalog sales, was obsolete in the e-commerce era.

Broader taxing power will let state and local governments collect an extra $8 billion to $23 billion a year, according to various estimates. All but five states impose sales taxes.

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Wayfair Inc. plunged as much as 9.5 percent on the news, and was down 2.7 percent to $113.05 at 10:55 a.m. in New York trading. Amazon.com Inc. dropped as much as 1.7 percent to $1,720.77; EBay Inc. dropped as much as 1.5 percent and Etsy Inc. fell as much as 4 percent.

The ruling will put new pressure on those companies and other internet retailers and marketplaces that don’t always collect taxes – including Overstock.com Inc., Newegg Inc. and thousands of smaller merchants. Overstock.com lost as much as 3.5 percent; while 1-800 Flowers.com Inc. dropped as much as 1.1 percent and online educational service Chegg Inc. dropped as much as 7.8 percent.

It will also affect Amazon, though the biggest online retailer wasn’t involved in the case. Amazon charges consumers in states that impose a sales tax, but only when selling products from its own inventory. About half its sales involve goods owned by third-party merchants, many of which don’t collect tax. An Amazon spokeswoman declined to comment.

The court upheld a South Dakota law that requires retailers with more than $100,000 in sales or 200 transactions annually in the state to pay a 4.5 percent tax on purchases.

“Retailers have been waiting for this day for more than two decades,” said Matthew Shay, chief executive officer of the National Retail Federation. “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.”

The measure was opposed by Wayfair, Overstock and Newegg. They said small sellers would be hit with heavy costs of complying with rules for thousands of products in thousands of taxing jurisdictions.

About 16 states already have laws that will let them require tax collection by internet retailers in the coming months, and more could follow quickly.

Retroactive taxes

Internet retailers say they are especially worried tax collectors will try to impose years of retroactive liability, which the laws of many states allow. South Dakota and its allies say those concerns are overblown for practical and legal reasons.

Kennedy didn’t directly decide whether states could try to collect taxes retroactively, but he said the issue wasn’t a reason to keep the physical-presence rule. He said the court had other legal tools to ensure that sales taxes don’t become an “undue burden” on small businesses and startups.

He wrote that “each year, the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the states.”

Justices Clarence Thomas, Neil Gorsuch, Ruth Bader Ginsburg and Samuel Alito joined Kennedy in the majority.

In dissent, Chief Justice John Roberts said the court should have left it to Congress to change the physical-presence rule.

‘Critical segment’ of economy

“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 wrote.

Congress could still intervene. Amazon and Overstock are among the companies that say they support a nationwide law that would relieve retailers from dealing with a patchwork of state tax laws.

Grover Norquist, president of the anti-tax group Americans for Tax Reform, said in a statement, “Today the Supreme Court said yes — you can be taxed by politicians you do not elect and who act knowing you are powerless to object.”

The 1992 ruling, Quill v. North Dakota, turned on the so-called dormant commerce clause, a judge-created legal doctrine that says states can’t unduly burden interstate commerce unless authorized by Congress.

The Trump administration backed South Dakota in the case, urging that Quill be overturned or at least limited to catalog sales.

South Dakota urged the court to let sales taxes be imposed on companies with an “economic presence” in a state – a test South Dakota said its law would pass.

The case is South Dakota v. Wayfair, 17-494.

Greg Stohr is a reporter for Bloomberg News.