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Online Retailers Can Be Forced to Collect Tax, High Court Rules

June 22, 2018
“Retailers have been waiting for this day for more than two decades,” said Matthew Shay, CEO of the National Retail Federation. “This ruling clears the way for a fair and level playing field where all retailers compete under the same sales tax rules whether they sell merchandise online, in-store or both.”

The U.S. Supreme Court freed states and local governments to start collecting billions of dollars in new sales taxes from online retailers, overturning a ruling that had made much of the internet a tax-free zone and put traditional retailers at a disadvantage.

News of the ruling caused shares of Internet retailers including Inc. and Wayfair Inc. to fall.

The court’s 1992 decision involving catalog sales had shielded retailers from tax-collection duties if they didn’t have a physical presence in a state. Writing for the 5-4 court on June 21, Justice Anthony Kennedy said that ruling was obsolete in the e-commerce era.

Broader taxing power will let state and local governments collect an extra $8 billion to $23 billion a year, according to various estimates. All but five states impose sales taxes.

Wayfair plunged as much as 9.5%on the news, and was down 1% to $115.13 at 1:25 p.m. in New York trading. dropped as much as 1.9%; EBay Inc. dropped as much as 12.6% and Etsy Inc. fell as much as 5.7%.

The ruling will put new pressure on those companies and other internet retailers and marketplaces that don’t always collect taxes -- including Inc., Newegg Inc. and thousands of smaller merchants. lost as much as 7.3%; while 1-800 Inc. dropped as much as 1.3 % and online educational service Chegg Inc. dropped as much as 7.8%. Avalara Inc., which makes tax-processing software, rose 11.9% to $50.37 at 1:33 p.m.

Retailers Have One Less Excuse as States Can Tax Online Sales

Amazon, the biggest online retailer, wasn’t involved in the case. Amazon charges consumers in states that impose a sales tax, but only when selling products from its own inventory. About half its sales involve goods owned by millions of third-party merchants, many of which don’t collect tax.

A key question for Amazon will be how states will go about collecting taxes from those sellers. An Amazon spokeswoman declined to comment.

The ruling is a victory for South Dakota, whose law requires retailers with more than $100,000 in sales or 200 transactions annually in the state to pay a 4.5% tax on purchases.

Although the court left open the possibility that other arguments could be pressed against the South Dakota law, Kennedy’s majority opinion strongly suggested the measure was constitutional, in part because it has the $100,000 threshold and doesn’t try to impose retroactive taxation.

"South Dakota’s tax system includes several features that appear designed to prevent discrimination against or undue burdens upon interstate commerce," Kennedy wrote.

President Donald Trump told governors meeting at the White House that the ruling is “a big, big victory” for them and that it was a “good decision.” The Trump administration backed South Dakota in the case, urging that the 1992 ruling be overturned or at least limited to catalog sales.

Not a ‘Green Light’

Andy Pincus, a Washington lawyer who filed a brief on behalf of EBay and a group of small businesses, said the ruling wasn’t a "green light" for other states. "They’re going to have to meet some additional constitutional tests," he said.

About 16 states already have laws similar to South Dakota’s that could let them require tax collection by internet retailers in the coming months, and more could follow quickly. Other states would have to revise their tax laws.

Traditional retailers declared victory.

“Retailers have been waiting for this day for more than two decades,” said Matthew Shay, CEO of the National Retail Federation. “This ruling clears the way for a fair and level playing field where all retailers compete under the same sales tax rules whether they sell merchandise online, in-store or both.”

Marketplaces such as EBay, which depend on millions of small merchants selling goods on their platforms, are now pushing for federal legislation providing exemptions for small businesses.

“Today’s ruling is limited to large online retailers and confirms that small businesses are clearly viewed differently by the court," EBay said. "Now is the time for Congress to provide clear tax rules with a strong small business exemption.”

Retroactive Taxes

Internet retailers say they are especially worried that tax collectors will try to impose years of retroactive liability, which the laws of many states allow. South Dakota and its allies say those concerns are overblown for practical and legal reasons.

Kennedy didn’t directly decide whether states could try to collect taxes retroactively, but he said that issue wasn’t a reason to keep the physical-presence rule. He said the court had other legal tools to ensure that sales taxes don’t become an "undue burden" on small businesses and startups.

Justices Clarence Thomas, Neil Gorsuch, Ruth Bader Ginsburg and Samuel Alito joined Kennedy in a majority that cut across ideological lines.

In dissent, Chief Justice John Roberts said the court should have left it to Congress to change the physical-presence rule.

Critical Segment’ of Economy

"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," the chief justice wrote.

The South Dakota measure was opposed by Wayfair, Overstock and Newegg. They said small sellers would be hit with heavy costs of complying with rules for thousands of products in thousands of taxing jurisdictions.

Congress could still intervene. Amazon and Overstock are among the companies that say they support a nationwide law that would relieve retailers from dealing with a patchwork of state tax laws.

The 1992 ruling, Quill v. North Dakota, turned on the so-called dormant commerce clause, a judge-created legal doctrine that says states can’t unduly burden interstate commerce unless authorized by Congress.

Kennedy wrote that "each year, the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the states."

‘Tax Shelter’

He added: "Quill has come to serve as 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 consumer."

South Dakota urged the court to let sales taxes be imposed on companies with an "economic presence" in a state -- a test South Dakota said its law would pass.

Grover Norquist, president of the anti-tax group Americans for Tax Reform, said in a statement, "Today the Supreme Court said yes -- you can be taxed by politicians you do not elect and who act knowing you are powerless to object."

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