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Supreme Court and Sales Tax: Why You Might Have to Pay More to Shop Online

July 2, 2018

The Internet has transformed the national economy in recent years as America has gradually become a nation of online shoppers. E-commerce offers a number of appealing perks: low prices, stay-at-home convenience, a myriad of choices, and—until now—sales tax-free purchasing.

On June 21, 2018, a divided Supreme Court ruled in South Dakota v. Wayfair, Inc., et al. that internet retailers can be required to collect sales tax in states where the merchant has no physical presence. While the ruling may make it harder for online purchasers to enjoy sales tax-free shopping, it is also considered “a victory for brick-and-mortar businesses that are forced to charge a sales tax while online competitors are not. Many expect that the ruling will help state and local governments to improve their tax enforcement and give local businesses a leg up in the competition with online retailers, particularly local businesses in rural areas, which have struggled to compete with the low-cost convenience of Amazon and Etsy.

The Court’s decision overturns a 1992 ruling in Quill Corp. v. North Dakota, in which the Court ruled that states could not require retailers to collect sales taxes unless they had a physical presence in the place where the buyer was located. Major online retailers, including Amazon, have been able to avoid collecting sales tax by building data centers and other facilities in multiple locations. Now, however, consumers will not be able to evade sales tax by purchasing from an out-of-state retailer, which gives states the potential to collect billions more in annual revenue. Writing for the majority in the 5-to-4 ruling, Justice Anthony Kennedy stated that the Court’s previous affirmation in Quill of the physical-presence rule causes states to lose up to $33 billion in annual tax revenues, a loss that the Wayfair ruling could allow states to recoup. Retailers like Amazon may have a daunting task ahead of them in ensuring that their sellers stay compliant, but whether the burden of compliance will fall on the retailers or on the sellers is as yet unclear.

In anticipation of the Wayfair ruling, several states, including North Dakota, have passed laws modeled on South Dakota’s, allowing the state to enforce collection of sales tax on online purchases. Other states, however, still have to change their laws in order to take advantage of the decision. Legislatures may be confronted with a number of legal challenges in creating these laws, such as whether taxes should be collected on very small transactions or whether states may seek sales taxes retroactively.

While many anticipate that the Court’s ruling will help local businesses compete with online retailers, the effect of the decision on the national economy remains to be seen. For a medium as powerful and wide-reaching as the Internet, any change in governing rules has the potential to make a very broad impact.