SCOTUS Rules States Can Require Online Shoppers To Pay Sales Tax

by Bamidele Ogunberu Posted on June 21st, 2018

Washington, D.C., USA: The U.S. Supreme Court on Thursday, in South Dakota v. Wayfair Inc, ruled 5-4 that states may collect sales tax from internet retailers. The ruling overruled a 1992 precedent in Quill Corp. v. North Dakota which held that the Constitution’s dormant commerce clause bars states from collecting sales taxes from retailers without a brick-and-mortar presence in the state. The previous decision was

Justice Anthony M. Kennedy wrote the majority opinion, joined by Justice Ruth Bader Ginsburg and the court’s three most conservative justices.

“The physical presence rule of Quill is unsound and incorrect,” Kennedy wrote. “Though Quill was wrong on its own terms when it was decided in 1992, since then the internet revolution has made its earlier error all the more egregious and harmful.”

In 1992 when Quill was decided, less than 2 percent of Americans had internet access, compared to about 89 percent today Kennedy wrote. When Quill was decided, “the court could not have envisioned a world in which the world’s largest retailer would be a remote seller,” namely, Amazon, Kennedy said.

In 1992, mail-order sales in the United States totaled $180 billion. Last year, e-commerce retail sales alone were an estimated $453.5 billion.

Kennedy also said the rule had created an unfair system favoring internet retailers. “In effect,” he wrote, “Quill has come to serve as a judicially created tax shelter for businesses that decide to limit their physical presence.” The decision was also having an impact on states’ bottom line, Kennedy said, citing estimates that states are losing $8 billion to $33 billion a year in sales tax revenue.

Chief Justice John G. Roberts Jr. dissented in an opinion joined by Justices Stephen G. Breyer, Sonia Sotomayor and Elena Kagan.

Roberts said he agreed that a 51-year-old case partly affirmed by Quill was wrongly decided, but he opposes discarding the physical presence rule because the internet economy has grown in reliance on it. Any change to rules with the potential to disrupt such a critical segment of the economy should be left to Congress, Roberts said.

Collecting taxes on all e-commerce sales “will likely prove baffling for many retailers,” Roberts said. More than 10,000 jurisdictions collect sales taxes, with differing rates and rules.

“This is neither the first, nor the second, but the third time this court has been asked whether a state may obligate sellers with no physical presence within its borders to collect tax on sales to residents,” Roberts wrote. “Whatever salience the adage ‘third time’s a charm’ has in daily life, it is a poor guide to Supreme Court decision-making.”

At issue in the case was the constitutionality of a South Dakota law that requires out-of-state retailers to pay sales taxes if they make at least 200 sales or at least $100,000 in sales. The law was not retroactive, Kennedy pointed out.

Major online retailers Wayfair Inc., Overstock.com and Newegg Inc. challenged the constitutionality of the law after South Dakota asked a court to force the retailers to register for licenses to collect and remit sales tax.

The retailers argued that overturning the ruling would cause chaos for businesses as thousands of different tax jurisdictions passed their own online sales tax laws.

The state, however, argued Quill was problematic because it put brick-and-mortar businesses at a disadvantage compared to online businesses and because it was costing states valuable tax revenue.

Supreme Court Ruling In South Dakota v. Wayfair Inc

Market Reaction

The dollar weakened after the Supreme Court ruled Thursday that states can require online merchants to collect sales tax. Shares of e-commerce companies, including Amazon.com, eBay and Etsy, fell.

U.S. government bond yields, which have moved largely in sync with the dollar, fell as some investors to bought bonds on the expectation the ruling could hurt growth. Yields fall as bond prices rise.

Author

Bamidele Ogunberu

Bamidele Ogunberu

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