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Online Sales Tax Fight Expected to Land in U.S. Supreme Court

As e-commerce has gained in popularity, competition from online retailers has been fierce—and, some say, unfair.

Thanks to a 1992 U.S. Supreme Court ruling in Quill Corp v. North Dakota, companies don’t have to collect state sales tax on e-commerce purchases unless the retailer has a physical presence there. Brick-and-mortar businesses will tell you it gives their online competitors an advantage. And states that collect sales taxes will tell you exactly how much the law is costing them in potential revenue.

The National Conference of State Legislatures estimates it costs states $17.2 billion. As a result, several states are fighting to have the ruling overturned.

A law passed last year by South Dakota requiring retailers to collect the state’s 4.5 percent sales tax if they did more than $100,000 in online sales or conducted 200 transactions there is believed to have been enacted specifically to instigate a new U.S. Supreme Court case. And it may do just that. Last week, the South Dakota Supreme Court ruled in a suit brought by, Wayfair and NewEgg that given the ’92 ruling, companies can’t be required to collect state taxes.

The South Dakota decision is expected to result in a new U.S. Supreme Court review and ruling on the matter.

The Retail Industry Leaders Association is eager to have the Court revisit the “loophole,” which it says has “done significant damage to thousands of brick and mortar retailers, and meant billions in lost revenue for state and local governments,” said Deborah White, Retail Litigation Center president.

The association is optimistic that a new case would mean a reversal on the Quill decision given that Supreme Court Justice Anthony Kennedy has said the “Internet has caused far-reaching systemic and structural changes in the economy” that the court needs to address.

Calling the ’92 ruling “out of date,” the National Retail Federation wants Congress to step in. “It’s time for Congress to pass a law that recognizes the evolution in the retail industry over the past two-and-half decades and say that online sellers should no longer be given an unfair advantage over Main Street merchants,” NRF Senior Vice President for Government Relations David French said. “We are more than happy to see the Supreme Court revisit this issue, but we view a carefully crafted stakeholder-led decision in Congress as far preferable to a judicial decision that reverses the previous ruling without addressing the details of implementation.”

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The NRF supports the Remote Transactions Parity Act, which would give states the power to collect sales taxes from online retailers. The legislation also includes provisions for small businesses that might otherwise be burdened by compliance issues.

The topic of online retailers and sales taxes recently made headlines when President Trump called out Amazon for undermining other retailers and risking jobs in a tweet in August.

Though Amazon does collect sales taxes on direct sales, it doesn’t automatically do so on items offered through its marketplace. It simply provides sellers the ability to so.

While states and retail groups might be in favor of reversing the Quill ruling, it seems the majority of shoppers fall on the other side of the debate. A recent poll by Rasmussen revealed that 66 percent of Americans are against state sales taxes on online purchases with only 21 percent in favor of it.