The Supreme Court handed a victory to the brick-and-mortar crowd Thursday, signing off on a South Dakota law that forces e-commerce companies to collect state sales tax.
The move overturns a prior ruling from the high court that forced e-commerce companies to collect sales tax only in states where they had a physical presence.
“Retailers have been waiting for this day for more than two decades,” said Matthew Shay, president and chief executive officer of the National Retail Federation. “The retail industry is changing, and the Supreme Court has acted correctly in recognizing that it’s time for outdated sales tax policies to change as well.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.”
A 2016 South Dakota law required out-of-state online merchants with more than $100,000 in annual sales or more than 200 transactions in a year to collect sales tax. Wayfair, Overstock.com and Newegg challenged that ruling and won on the basis of the Supreme Court’s 1992 ruling in Quill Corp. v. North Dakota, which required that only merchants with a “physical presence” in a given state could be forced to collect sales tax.
The court has now found that the “physical presence rule of Quill is unsound and incorrect.”
That reorders the tax dynamic between online and off-line retailers. Shay said, “Congress must now follow the court’s lead and pass legislation implementing uniform national rules that provide consistency and clarity for retailers across the country.”
A significant amount of money is in play. The sales tax dollars — which consumers were supposed to pay directly to the states anyway, but often did not — could help fill states’ coffers.The court pointed to estimates suggesting South Dakota, a sparsely populated state, lost between $48 million and $58 million annually because of the prior rule.
That is money that e-commerce companies will now have to collect and pay to the state.
The change has been in the air for a while and e-commerce leader Amazon has been preparing, collecting state sales tax in certain states since 2011.
Charlie O’Shea, lead retail analyst at Moody’s Investors Service: “In the case of Amazon, its proprietary sales will be largely unaffected as it is already collecting sales tax in ‘sales tax’ states in which it operates a physical presence, [but] the impact on its growing third-party business could be meaningful as, up until now, a chunk of these sales have not been taxed.
“As Amazon has continued to thrive despite losing the obvious pricing benefit it used to have from not collecting sales taxes in its proprietary business, it remains to be seen if this new ruling will have any real impact on its third-party sales, or if the convenience for shoppers and growing benefits to Prime members will mitigate the pricing shift,” he said.
Others weighed in saying the ruling would hurt small businesses.
“Today’s Supreme Court decision will harm America’s innovators and small businesses,” said Jonathan Hauenschild, Counsel of Record for The American Legislative Exchange Council. “By permitting states to tax businesses outside of their borders, the Supreme Court’s decision will usher in a new, unheralded period in interstate commerce. Small businesses and innovators will be subject to over 12,000 taxing jurisdictions in the United States. They will face audits and compliance costs very few can comprehend. And many businesses will likely limit their reach or go out of business rather than face the risk of audit from states like California, Illinois, or New York. At this point, only Congress can save small businesses and innovators by passing legislation to protect them from over-aggressive state tax collectors.”