In a 5-4 decision, the U.S. Supreme Court ruled today that states could choose to collect sales tax from out-of-state online retailers. The ruling overturns a 1992 court ruling that prohibited states from collecting taxes from businesses without a physical presence in the state. In 2017, ecommerce was responsible for 13 percent of total retail sales and 49 percent of retail sales growth.

The case upheld a law in South Dakota that requires certain online retailers, even those outside the state, to collect the state’s sales tax. Writing the majority opinion for South Dakota v. Wayfair, Inc., Justice Anthony Kennedy noted, “Between targeted advertising and instant access to most consumers via any internet-enabled device, ‘a business may be present in a state in a meaningful way without’ that presence ‘being physical in the traditional sense of the term.’”

South Dakota v. Wayfair overturns 1992’s Quill v. North Dakota, which Kennedy described as unsound. He says, “Quill creates rather than resolves market distortions. In effect, it is a judicially created tax shelter for businesses that limit their physical presence in a state but sell their goods and services to the state’s consumers, something that has become easier and more prevalent as technology has advanced.

“The rule also produces an incentive to avoid physical presence in multiple states, affecting development that might be efficient or desirable. Quill imposes the sort of arbitrary, formalistic distinction that the court’s modern Commerce Clause precedents disavow in favor of ‘a sensitive, case-by-case analysis of purposes and effects,’” he adds.

“Quill puts both local businesses and many interstate businesses with a physical presence at a competitive disadvantage relative to remote sellers.”

Dissenting from the court’s ruling were Chief Justice John Roberts and Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan. Writing the dissent, Robert notes, “The burden will fall disproportionately on small businesses. One vitalizing effect of the internet has been connecting small, even ‘micro’ businesses to potential buyers across the Nation. People starting a business selling their embroidered pillowcases or carved decoys can offer their wares throughout the country—but probably not if they have to figure out the tax due on every sale. … The court’s decision today will surely have the effect of dampening opportunities for commerce in a broad range of new markets.”

The court’s ruling only affects South Dakota’s law, which requires businesses with more than $100,000 in annual sales or 200 transactions in the state to apply sales tax. Further expansion may depend on the states or Congress. A bipartisan online sales tax bill passed the Senate in 2013 only to stall in the house. Sen. Lamar Alexander (R-TN), one of the sponsors of that bill, said, “The Court’s decision is good news for Main Street business and for states. It correctly leaves to states decisions about who should pay state sales and use taxes and how they should be collected. It stops the federal government from forcing states to prefer out-of-state businesses over Main Street. There still may be a need for Congress to act to adopt the simplified collection of sales tax procedures in the Marketplace Fairness Act that 69 United States senators voted for in 2013.”

Sen. Ron Wyden (D-OR), ranking member of the Senate Finance Committee, countered the decision in a statement, saying, “The Supreme Court has given the green light for states to establish an underground, nationwide, privatized tax-collecting bureaucracy. With this ruling, sellers from other countries won’t have to collect tax, which will give them a big leg up over American producers and sellers.”

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