Supreme Court Gives States Power to Collect Online Sales Tax

Last month, the Supreme Court ruled that individual states have the right to require internet retailers to collect sales tax on online purchases even in cases where the company does not have a substantial physical presence in the state to which the taxes are being paid. This decision, passed down in the case of South Dakota v. Wayfair Inc., reversed the Quill decision of 1992 which ruled in the other direction. The reversal does not come as a surprise given the fact that the volume of internet sales has ballooned over the past two decades, making online sales tax a much larger issue than it was 26 years ago.

The state of South Dakota prompted the recent Supreme Court decision by passing a law requiring that all online retailers with more than 200 transactions in the state or an annual revenue of over $100,000 collect a 4.5% sales tax. They subsequently sued three large online retailers for failing to comply, at which point the matter was turned over to the courts. When the lower courts ruled in favor of the retailers, the matter was appealed to the Supreme Court, the result of which was the recent ruling giving states the power to collect online sales tax. Several other states have since followed South Dakota’s lead with more expected to follow.

According to Carl Davis, Director of Research at the Institute on Taxation and Economic Policy, the new tax law will improve the tax enforcement of state and local governments and “put local businesses on a more level playing field.” Judge Anthony Kennedy, who cast his vote in support of the recent Supreme Court decision, agrees with Davis. He notes that the states have lost in excess of $30 over the years due to their inability to collect sales tax from online retailers. In addition, Kennedy points out that the absence of an enforced online sales tax law has forced brick and mortar businesses to operate at a distinct competitive disadvantage with respect to internet retailers.

However, in spite of the positive responses to the recent Supreme Court decision discussed above, others are quick to point out possible negative effects. For example, some are of the opinion that the new sales tax ruling will hinder the start-up and growth of small online businesses. As Overstock.com board member Jonathan Johnson III points out, these companies have “been a driving force behind our nation’s economy for the last 15 years” so anything that slows their growth will automatically have a negative impact on the overall economy. In particular, there is the concern that small internet start-ups will have a compliance issue in trying to keep up with the varying tax requirements of over 12,000 local and state tax districts.

No matter which side you take, the current and future status of the internet sale tax is an important business tax concern. With annual internet sales for 2017 totaling more than a half trillion dollars, one thing is certain … the landscape of online selling is has changed dramatically since the original Supreme Court sales tax decision was handed down in 1992. Now that all is said and done, only time will tell how this new ruling will affect

things going forward.

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