U.S. Top Court Lets States Force Online Retailers to Collect Sales Tax
States may force online retailers to collect potentially billions of dollars in sales taxes, the U.S. Supreme Court said in a major ruling on Thursday, that undercut an advantage many e-commerce companies have enjoyed over brick-and-mortar rivals.
The justices overturned a 1992 high court precedent that had barred states from requiring businesses with no “physical presence” there, like out-of-state online retailers, to collect sales taxes. Because many e-commerce companies do not collect state sales taxes on purchases, they have had an advantage over brick-and-mortar businesses that do collect it.
The ruling also likely will result in many consumers paying more for online purchases. However, it’s clear that retailers are going to try to incorporate increases in the prices to pass along the higher costs to the consumer. The ruling is likely to prompt other states to try to collect sales tax on purchases from out-of-state online businesses more aggressively. Forty-five of the 50 states currently impose sales taxes on in state purchases.
The court revived a 2016 South Dakota law that required larger out-of-state e-commerce companies to collect sales tax, a mandate that the online retailers fought in court. The South Dakota law, enacted in 2016, required out-of-state online retailers to collect sales tax if they amass $100,000 in sales or 200 separate transactions. However, the law could yet face legal challenges on other grounds, Justice Kennedy noted. Other states that pass similar laws are also likely to end up in court. Absent congressional action, significant litigation is expected, as states try to push the envelope on this.
“Rejecting the physical presence rule is necessary to ensure that artificial competitive advantages are not created by this court’s precedents”, Kennedy said. In the digital era, the costs of complying with different tax regimes “are largely unrelated to whether a company happens to have a physical presence in a state,” Kennedy wrote.
It will take time to unravel all the implications, and federal legislation may still be coming in this area. We can help you determine how to proceed, please call us for an appointment.