Consumers can expect to see sales tax charged on more online purchases after a recent Supreme Court decision. States will now be able to force more people to pay sales tax when they make purchases online. The decision is a big financial win for states.
In the early days of the internet, online retailers were exempted from sales taxes in states in which they did not have a physical presence. In a couple of previous decisions, the U.S. Supreme Court held that mail-order retailers with no physical presence in a state shouldn’t have to collect sales taxes from customers in that state. This allowed many sellers that had a physical presence in only a single state or a few states to avoid charging sales taxes when shipping products to addresses outside those states.
The Supreme Court’s 5-4 decision means that states can now pass laws requiring out-of-state sellers to collect the state’s sales tax from customers and send it to the state. Justice Anthony Kennedy, joined by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito and Neil Gorsuch, wrote in an opinion that “Each year the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the States.”
Chief Justice John Roberts, joined by Justices Stephen Breyer, Elena Kagan and Sonia Sotomayor, dissented. Roberts wrote, “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. 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.”
Retail trade groups praised the ruling, saying it levels the playing field for local and online businesses. The Small Business & Entrepreneurship Council advocacy group said it will “create havoc for small businesses and the marketplace.” Online-only retailers may face the biggest headaches complying with various state sales tax laws, though there are software options to help. Amazon.com already collects sales tax in every state that charges it, though third-party sellers who use the site don’t have to.