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The Supreme Court’s Online Sales Tax Decision Is Going to Cost You

In a ruling for South Dakota v. Wayfair, SCOTUS says states can collect sales tax.

Photo: Dominic Labbe/Getty Images

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The United States Supreme Court has sided in favor of states collecting online sales tax in the South Dakota v. Wayfair decision. The Court has ruled that states are allowed to collect tax from online retailers even if companies don’t have a physical presence in the state.

In what has been called the “tax case of the millennium,” South Dakota was looking to repeal the 1992 Quill v. North Dakota decision, which ruled that companies could only charge sales tax in states where they had a physical presence, like corporate offices or a warehouse.

South Dakota v. Wayfair made its way all the way to the Supreme Court, with the support of 40 other states. While South Dakota argued that states were losing out on billions of dollars worth of sales tax, Wayfair argued that implementing a mandatory tax could hurt — and potentially kill — businesses. As one eBay seller told the Washington Post a few months ago, “It doesn’t seem fair to me to have to pay taxes in an area I’ve never even visited before. If we had to start charging sales tax, it would put us out of the market.”

In a 5-4 vote, the Supreme Court decided to overturn the decision from Quill, agreeing that e-commerce has completely changed the way Americans spend money.

“The Quill Court did not have before it the present realities of the interstate marketplace, where the Internet’s prevalence and power have changed the dynamics of the national economy,” Justice Anthony Kennedy wrote in the decision.

Times certainly have changed. The online shopping business was valued at $360 billion in 2016, with the holiday season alone seeing $107 billion in sales. In the decision, Kennedy noted that the “presence” aspect of the Quill case was costing states up to $33 billion annually; just in South Dakota, the state was losing between $48 million and $58 million a year.

The president tweeted about the ruling Thursday afternoon, praising the decision.

The ruling reverses a major Supreme Court decision on online tax

In the 1960s, the Supreme Court decided only businesses with a physical presence had to add sales tax to purchases, a decision further cemented with Quill v. North Dakota in 1992. North Dakota’s tax commissioner attempted to get Quill Corporation, an office supply retailer, to pay taxes on its business in the state. North Dakota argued that since Quill had so many customers in the state, it should be considered a North Dakota company and pay local taxes.

But because Quill had no physical presence or any workers living in North Dakota, and was instead doing business through out-of-state mail orders and phone orders, the Supreme Court ruled that the business could avoid the local taxes. Since then, businesses have relied on the case as a legal defense for not collecting taxes in states where they were not physically located.

South Dakota v. Wayfair originated in 2016, when the state passed a law requiring websites to charge residents an online sales tax. After it passed, South Dakota sued four sites — the home goods site Wayfair, as well as the discount retailer, gadgets destination Newegg, and industrial equipment supplier Systemax — for not complying. A lower court initially struck down South Dakota’s law because of the 1992 Quill decision.

During the Supreme Court’s oral arguments, South Dakota’s attorney general lamented that “our states are losing massive sales tax revenues that we need for education, health care and infrastructure. Our small businesses on Main Street are being harmed because of the unlevel playing field created by Quill, where out-of-state remote sellers are given a price advantage.”

Wayfair said that businesses would drown in the sheer logistics of having to comply with each state’s dizzying array of varying tax codes. Wayfair also argued that some states could demand retroactive tax collection, which could wipe businesses off the map.

In the decision, Kennedy actually praised South Dakota’s tax system, noting that it includes “several features that appear designed to prevent discrimination against or undue burdens upon interstate commerce.” The decision, it’s worth noting, did not say if states can or cannot collect retroactive taxes.

Kennedy also delivered a particularly spicy blow to Wayfair.

“Its advertising seeks to create an image of beautiful, peaceful homes, but it also says that ‘one of the best things about buying through Wayfair is that we do not have to charge sales tax,’” he wrote. “What Wayfair ignores in its subtle offer to assist in tax evasion is that creating a dream home assumes solvent state and local governments.”

This is going to have major effects on shoppers and businesses

The SCOTUS decision is a huge triumph for states, and for brick-and-mortar retail — a segment of American business that could really use a win right now.

“Quill puts both local businesses and many interstate businesses with physical presence at a competitive disadvantage relative to remote sellers,” Kennedy wrote. “Remote sellers can avoid the regulatory burdens of tax collection and can offer de facto lower prices caused by the widespread failure of consumers to pay the tax on their own.”

This ruling will no doubt have dramatic effects on American companies, in particular Amazon, which doesn’t exactly get a gold star for tax compliance, as President Trump noted in an angry tweet in March. The Seattle e-commerce giant charges a sales tax for merchandise it sells in house, but it does not require third-party businesses selling on Amazon Marketplace to charge sales tax (Amazon Marketplace is responsible for half of Amazon’s sales). Wayfair, too, charges a sales tax for the stuff it sells itself, but does not require that third-party vendors on its site do so.

Such a dramatic change to American business law concerned conservative Chief Justice John Roberts, who dissented on the grounds that such a decision shouldn’t be handled in court.

“E-commerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical presence rule,” Roberts argued. “Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress.”

In a comment on the court case decision, GlobalData Retail managing director Neil Saunders wrote in an email to Racked: “From an economic perspective, today’s Supreme Court ruling will come as a relief for states desperate for revenue. It will also be welcomed by those physical and omnichannel retailers which have a national presence and, therefore, already charge and remit sales tax in most states.”

Added to the list of those this will affect, of course, is the consumer. Shoppers will now have to allocate more money to their online shopping habit. Saunders adds that small businesses might indeed suffer because of the Quill overturn.

“There are well over 10,000 tax jurisdictions across the United States,” he says. “Within each, there are various exemptions and rates for different products. This results in an extremely complex and intricate web of rules. While larger retailers will be able to cope with this, the challenge for smaller players will be significant and the concern here is that complexity could stymie innovation and entrepreneurialism.”

Saunders does believe states may overlook small businesses, instead focusing on collecting taxes from big players like Amazon. Perhaps this how the playing field between Amazon and everyone else starts to get leveled.