High Court: Online shoppers can be forced to pay sales tax
WASHINGTON — States will be able to force more people to pay sales tax when they make online purchases under a Supreme Court decision Thursday that will leave shoppers with lighter wallets but is a big financial win for states.
Consumers can expect to see sales tax charged on more online purchases — likely over the next year and potentially before the Christmas shopping season — as states and retailers react to the court’s decision, said one attorney involved in the case.
The Supreme Court’s 5-4 decision Thursday overruled a pair of decadesold decisions that states said cost them billions of dollars in lost revenue annually. The decisions made it more difficult for states to collect sales tax on certain online purchases, and more than 40 states had asked the high court for action.
The cases the court overturned said that if a business was shipping a customer’s purchase to a state where the business didn’t have a physical presence such as a warehouse or office, the business didn’t have to collect sales tax for the state.
Justice Anthony Kennedy wrote that the previous decisions were flawed.
“Each year the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the States,” he wrote in an opinion joined by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito and Neil Gorsuch. Kennedy wrote that the rule “limited States’ ability to seek longterm prosperity and has prevented market participants from competing on an even playing field.”
The ruling is a victory for big chains with a presence in many states, since they usually collect sales tax on online purchases already. Now, rivals will be charging sales tax where they hadn’t before.
Until now, many sellers that have a physical presence in only a single state or a few states have been able to avoid charging sales taxes when they ship to addresses outside those states. Sellers that use eBay and Etsy, which provide platforms for smaller sellers,
also haven’t been collecting sales tax nationwide.
Under the ruling Thursday, states can pass laws requiring out-of-state sellers to collect the state’s sales tax from customers and send it to the state. More than a dozen states have already adopted laws like that ahead of the court’s decision, according to state tax policy expert Joseph Crosby.
In Arkansas, online giant Amazon voluntarily started to collect state sales tax last year, though taxes are only collected on Amazon products, not those sold on the site by a third-party vendor.
Arkansas state officials were staying cautious in the wake of the ruling, with House Revenue and Taxation Committee Chairman Joe Jett, R-Success, telling the Arkansas Democrat-Gazette that lawmakers likely will “take a wait-andsee approach” as they would prefer the federal government to get involved to avoid “a hodgepodge” of different tax codes across the country.
“I expect states to move quickly in light of the Court’s decision and I will be consulting with the Department of Finance and Administration and members of the General Assembly to determine what, if any, action needs to be taken in Arkansas,” Arkansas Gov. Asa Hutchinson told the DemocratGazette in a written statement.
Department spokesman Scott Hardin told the Democrat-Gazette that the finance department’s attorneys are currently working to determine if legislation is needed before taxes can be collected on internet purchases. Hardin also told the newspaper that the Arkansas Department of Finance and Administration doesn’t have any figures for potential tax revenues that would be generated by an online sales tax.
Retail trade groups praised the ruling, saying it levels the playing field for local and online businesses. The losers, said retail analyst Neil Saunders, are online-only retailers, especially smaller ones. Those retailers may face headaches complying with various state sales tax laws, though there are software options to help. That software, too, can be an added cost. The Small Business & Entrepreneurship Council advocacy group said it will “create havoc for small businesses and the marketplace.”
Chief Justice John Roberts and three of his colleagues would have kept the court’s previous decisions in place.
“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,” Roberts wrote in a dissent joined by Justices Stephen Breyer, Elena Kagan and Sonia Sotomayor. The lineup of justices on each side of the case was unusual, with Roberts joining three more liberal justices and Ginsburg joining her more conservative colleagues.
Whether Congress will opt to get more involved in the issue after the Supreme Court decision is yet to be clear.
Arkansas’ congressional delegation has been split on the issue in the past, with Republican Sen. John Boozman supporting measures to allow states to make such a move. However, fellow Republican Sen. Tom Cotton, as well as Republican U.S. Rep. Bruce Westerman, who represents Arkansas’ 4th congressional district, have opposed the measure. Both Cotton and Westerman told the News-Times last fall that they saw such a move to be a new tax on consumers and did not support it.
Neither were available for comment Thursday.
When asked Thursday if Boozman had any comment on the ruling, his office released a statement that said it “removes an inequity that currently gives online businesses an advantage over traditional brick-and-mortar retailers.”
“By upholding a state’s right to collect sales taxes from e-retailers, the Court essentially placed all retailers on an equal footing,” Boozman said. “That is really all our main street businesses have been asking for all along—a level playing field. Now it is incumbent upon Congress to ensure that playing field remains truly level for businesses of all sizes.”
The case the court ruled on involved a 2016 law passed by South Dakota, which said it was losing out on an estimated $50 million a year in sales tax not collected by out-of-state sellers. Lawmakers in the state, which has no income tax, passed a law designed to directly challenge the physical presence rule. The law requires out-of-state sellers who do more than $100,000 of business in the state or more than 200 transactions annually with state residents to collect sales tax and send it to the state.
South Dakota wanted out-of-state retailers to begin collecting the tax and sued several of them: Overstock. com, electronics retailer Newegg and home goods company Wayfair. After the Supreme Court’s decision was announced, shares in Wayfair and Overstock both fell, with Wayfair down more than 3 percent and Overstock down more than 2 percent.