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Supreme Court Sides With States in Online Sales Tax Battle

Score one for brick-and-mortar businesses.

The U.S. Supreme court ruled Wednesday that states have the right to collect sales taxes from companies doing business within their borders—whether they have a physical presence there or not.

The court upheld a law passed in 2016 by South Dakota requiring online stores to collect the state’s 4.5% sales tax if they did more than $100,000 in sales or completed at least 200 transactions there.

The case, which pitted the state against e-commerce retailers Wayfair, Overstock and Newegg, challenged the 1992 Quill v. North Dakota high court ruling that determined it would be too burdensome to require companies to collect sales taxes in every jurisdiction across the land just because they sell to customers there.

This new current decision, however, found that Quill “allows remote sellers to escape an obligation to remit a lawful state tax is unfair and unjust. It is unfair and unjust to those competitors, both local and out of State, who must remit the tax; to the consumers who pay the tax; and to the States that seek fair enforcement of the sales tax, a tax many States for many years have considered an indispensable source for raising revenue.”

It continues, “It is essential to public confidence in the tax system that the Court avoid creating inequitable exceptions.”

In the early 90s, the primary business the justices were taking into account was mail order. Today, e-commerce sales totaled $453.5 billion in 2017 or 13 percent of total retail sales, according to the U.S. Census Bureau.

For South Dakota, those numbers support its position. The state contends that it has missed out on $33 billion because of the initial ruling. According to the General Accounting Office, the actual figure is no more than $13 billion—still a hefty sum.

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Brick-and-mortar retailers—and the groups representing them—say the ‘92 ruling has hurt them as well. The groups were instrumental in convincing the court to hear the case, arguing Quill was “distorting the retail market in favor of absentee ecommerce,” since online retailers had an unfair advantage over e-commerce sites.

Matthew Shay, president and CEO of the National Retail Federation, applauded the decision in a statement. “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,” he said.

Deborah White, general counsel for the Retail Industry Leaders Association and president of the Retail Litigation Center, also weighed in via a press release on the group’s site. “The Court clearly didn’t buy the argument made by the respondents in this case that remote sales tax compliance represented the same burden today that it did in 1992,” White said. “Through its decision, the Court has acknowledged that the same computing sophistication that has fueled exponential growth in e-commerce has also dramatically simplified remote sales tax collection.”

Not everyone was celebrating the decision however. Chief Justice John Roberts wrote the dissenting opinion, expressing concerns that the change could have a dampening effect on sales. “The burden will fall disproportionately on small businesses. One vitalizing effect of the Internet has been connecting small, even ‘micro’ businesses to potential buyers across the Nation,” he said, adding that current technology may be inadequate to keep up with tabulating the wide range of tax requirements. “And the software said to facilitate compliance is still in its infancy, and its capabilities and expense are subject to debate.”