US Supreme Court Gives The Green Light For Online Sales Taxes

States can collect sales taxes from online retailers thanks to a U.S. Supreme Court ruling on Thursday (June 21) that addressed one of the most controversial and longstanding issues in eCommerce.

The 5-4 decision essentially overturns the court’s 1992 ruling that states can collect sales taxes only from retailers that maintain a physical presence in those states. The 41 states that asked the Supreme Court to overturn that decision, Quill v. North Dakota, argued that it was “obsolete in an era of eCommerce,” according to a Washington Post report.

“Quill creates rather than resolves market distortions,” Justice Anthony Kennedy wrote in the majority decision. “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.”

A New Type of “Physical Presence”

In his majority opinion, Kennedy undercut the arguments about physical presence that, in his view, reflected a technological age that has passed since the Quill ruling.

“A company with a website accessible in South Dakota may be said to have a physical presence in the state via the customers’ computers,” he wrote. “A website may leave cookies saved to the customers’ hard drives, or customers may download the company’s app onto their phones. Or a company may lease data storage that is permanently, or even occasionally, located in South Dakota.”

Since the dawn of online retailing, the Quill ruling has allowed eCommerce firms to skip collecting a state’s sales tax if it shipped products to a state where it doesn’t have an office, warehouse or other physical presence. Brick-and-mortar retailers cried foul, with their complaints about unfair tax treatment growing louder as online retail continued to account for more of total U.S. retail sales.

Billions of Dollars at Stake

The implications of this ruling are enormous.

For starters, “a Government Accountability Office audit said states missed out on about $13.7 billion in tax revenue in 2017,” according to the report. The states that asked the Supreme Court to overturn the 1992 ruling told justices it costs them “billions of dollars in tax revenue each year, requiring cuts to critical government programs.”

As well, while many large eCommerce operators already factor in sales tax costs during consumer transactions — as Amazon expanded its distribution network by building warehouses in multiple states, it became subject to sales taxes — the laggards will have to charge consumers sales tax or otherwise figure out how to absorb that cost without threatening margins.

According to the Post, 19 of the 20 largest online retailers already collect sales taxes even if they have no physical presence as understood under Quill.

“Three large retailers — Wayfair, Overstock and Newegg — do not, and South Dakota sued them for failing to collect taxes after the state’s (online sales tax) law went into effect,” the report said.

Do Sales Taxes Really Matter?

That’s not to say sales taxes for online purchases will kill off such businesses — well, not if you believe a study that focused on Amazon, at least.

A Slice Intelligence investigation from two years ago that analyzed Amazon purchases in Colorado and South Carolina — both states already were collecting sales taxes for online purchases — found no long-lasting negative impact on eCommerce from those taxes.

“Statistically, there is no difference,” Slice VP and Principal Analyst Ken Cassar said at the time. “They [consumers] value the convenience more than they value the tax saving. The growing importance of convenience is one of the key trends impacting the eCommerce space.”

The new Supreme Court ruling stems from a challenge brought by South Dakota, which, according to the Post, passed a law mandating that retailers “with more than $100,000 in annual sales or 200 transactions in the state [must] pay a 4.5 percent tax.”

Now, in the wake of what will no doubt be an expansion of state sales taxes on eCommerce, some retailers fear that taxes could be applied retroactively, the newspaper said.

Should This Have Been Left to Congress?

Besides Kennedy, the justices who voted in the majority were Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito Jr. and Neil Gorsuch. A dissent from Chief Justice John Roberts said the matter of sales taxes for eCommerce should have been taken up by Congress, given the significant economic impacts.

“Any alteration to (establish commerce) rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress,” he wrote. “The court should not act on this important question of current economic policy solely to expiate a mistake it made over 50 years ago.”