States will be able to force shoppers 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 win for states.
More than 40 states had asked the high court to overrule two, decades-old Supreme Court decisions that they 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.
On Thursday, the Supreme Court agreed to overturn those decisions in a 5-4 ruling. 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 the state's sales tax. Customers were generally responsible for paying the sales tax to the state themselves if they weren't charged it, but most didn't realize they owed it and few paid.
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. These critiques underscore that the physical presence rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause," he wrote in an opinion joined by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito and Neil Gorsuch.
In addition to being a win for states, the ruling is also a win for large retailers, who argued the physical presence rule was unfair. Large retailers including Apple, Macy's, Target and Walmart, which have brick-and-mortar stores nationwide, already generally collect sales tax from their customers who buy online. That's because they typically have a physical store in whatever state the purchase is being shipped to. Amazon.com, with its network of warehouses, also collects sales tax in every state that charges it, though third party sellers who use the site to sell goods don't have to.
But sellers that only have a physical presence in a single state or a few states have been able to avoid charging customers sales tax when they shipped to addresses outside those states. Online sellers that haven't been charging sales tax on goods shipped to every state range from jewelry website Blue Nile to pet products site Chewy.com to clothing retailer L.L. Bean. Sellers who use eBay and Etsy, which provide platforms for smaller sellers, also haven't been collecting sales tax nationwide.
Under the Supreme Court's decision Thursday, states can pass laws requiring sellers without a physical presence in the state to collect the state's sales tax from customers and send it to the state.
The National Retail Federation trade group, said in a statement that the court's decision was a "major victory" but the group said federal legislation is necessary to spell out details on how sales tax collection will take place, rather than leaving it to each of the states to interpret the court's decision.
Chief Justice John Roberts and three of his colleagues would have kept the court's previous decisions in place. Roberts wrote that Congress, not the court, should change the rules if necessary.
"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 case the court ruled in has to do with a law passed by South Dakota in 2016. South Dakota's governor has said his state has been losing out on an estimated $50 million a year in sales tax that doesn't get collected by out-of-state sellers. Lawmakers in the state, which has no income tax, passed a law designed to directly challenge the Supreme Court's 1992 decision. 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 turn it over 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. The state conceded in court, however, that it could only win by persuading the Supreme Court to do away with its physical presence rule. After the decision was announced, shares in Wayfair and Overstock both fell, with Wayfair down more than 3 percent and Overstock down more than 2 percent.
The Trump administration had urged the justices to side with South Dakota.
The case is South Dakota v. Wayfair, 17-494.
Explore further: South Dakota court rejects law aimed at online sales taxes
