Supreme Court allows states to collect sales taxes on more online transactions

Richard Wolf | USA TODAY

Show Caption Hide Caption Supreme Court rules online retailers can now claim more sales tax Online purchases will likely get more expensive.

WASHINGTON — A closely divided Supreme Court upended the nation's Internet marketplace Thursday, ruling that states can collect sales taxes from online retailers.

The decision, which overturns an earlier Supreme Court precedent, will boost state revenues at the expense of consumers and sellers who have avoided sales taxes in the past. But the justices did not specify what types of exceptions states may impose to limit the burden on small businesses.

Justice Anthony Kennedy wrote the 5-4 decision, jettisoning the court's longstanding rule that states cannot require companies without a physical presence to collect sales taxes. He was joined by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito and Neil Gorsuch.

"The Internet's prevalence and power have changed the dynamics of the national economy," Kennedy wrote. "This expansion has also increased the revenue shortfall faced by states seeking to collect their sales and use taxes."

Chief Justice John Roberts dissented, saying the decision should be left to Congress, and was joined by Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan.

"The burden will fall disproportionately on small businesses," Roberts said. "The court's decision today will surely have the effect of dampening opportunities for commerce in a broad range of new markets."

The ultimate impact of the ruling remained in doubt, and lawyers for online retailers warned of future lawsuits to determine what businesses and consumers will have to do. The ruling only directly affected South Dakota, which had sought to collect taxes from online retailers with more than $100,000 in annual sales or 200 transactions in the state.

"States would be well advised not to try to go further than South Dakota did,” said former U.S. solicitor general Paul Clement. “If a state deviates from that model, they’ll be asking for trouble."

Kennedy said the court's 25- and 50-year-old precedents requiring sales tax collection only from physically present businesses represent "a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a state's consumers."

Faced with the South Dakota law and its exemptions for the smallest retailers, the justices nevertheless opened the door to states that may want to collect sales taxes from a larger number of sellers. Kennedy said Congress or lower courts could step in to referee those situations.

"If some small businesses with only de minimus contacts seek relief from collection systems thought to be a burden, those entities may still do so," he said. But the potential for problems, he said, "cannot justify retaining this artificial, anachronistic rule that deprives states of vast revenues from major businesses."

The high court ruled in 1967 and again in 1992 that companies without a physical presence in a state did not have to collect sales taxes. But those rulings applied mostly to mail-order catalog companies. In 1992, Amazon had not yet begun selling books out of Jeff Bezos' garage.

In its challenge, South Dakota noted that "times have changed," with online sales growing at four times the rate of total retail sales. As a result, state and local governments in 45 states lose billions of dollars annually in taxes. (Alaska, Delaware, Montana, New Hampshire and Oregon do not have sales taxes.)

“States have long fought the battle for Main Street businesses, and now, with today’s ruling, all businesses will compete on a level playing field,” South Dakota Gov. Dennis Daugaard said.

Three large online sellers that had challenged the state's law — Wayfair, Overstock.com and Newegg — warned that online retailers could face some 12,000 local tax jurisdictions if the Supreme Court sided with the states. They warned of economic chaos -- at least until Congress steps in.

In his dissent, Roberts warned that the decision could detract from E-commerce's "significant and vibrant part of our national economy."

"This court should not act on this important question of current economic policy, solely to expiate a mistake it made over 50 years ago," Roberts said.

When the court ruled in 1967 and 1992 that Illinois and North Dakota could not squeeze sales taxes from sellers with no presence in those states, there wasn't nearly as much at stake. Now consumers spend nearly $500 billion shopping online, a 10 percent share that will grow exponentially in the future.

Congress protected those Internet sellers in 1998 legislation that has since been made permanent. Then in 2000, a national commission urged states to simplify their tax systems as a precursor to taxing remote sellers. Twenty-four states including South Dakota eventually did so, but the nation's largest states, with 70 percent of the U.S. population, did not.

Stymied by the Supreme Court rulings and the Internet Tax Freedom Act, states have done their best to collect taxes on residents' out-of-state purchases. That has created a patchwork of laws. More than 20 states define a seller's physical presence as including any affiliated website. Ten states require out-of-state sellers to notify buyers and inform states of the unpaid sales taxes.

The Supreme Court in 2015 unanimously upheld Colorado's law requiring those notices and reports.

Most of the top 20 online sellers already collect taxes in nearly all states, either because they have added local showrooms or warehouses, or because of state laws. The top 100 retail sellers remit about 90 percent of the taxes owed.

But many smaller online retailers are women, minorities, veterans and people with disabilities who have taken advantage of the protections granted by the Supreme Court and Congress over the years.

The typical retailer on eBay sells between $10,000 and $500,000 annually, with customers in more than 300 tax jurisdictions. Etsy's sellers are even smaller: Nearly eight in 10 are sole proprietors, nearly nine in 10 are women, and nearly all are based in homes. Average annual sales: $1,710.

Reaction to the high court's ruling was mixed. State government groups hailed it as a boon for their revenue base, as well as a playing-field equalizer. But some lawmakers in Congress vowed revenge.

“The Supreme Court has given the green light for states to establish an underground, nationwide, privatized tax-collecting bureaucracy," said Sen. Ron Wyden, a Democrat whose state of Oregon has no sales tax.

Two sides: States, online sellers bring sales tax fight to Supreme Court in case that could affect millions