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Supreme Court Decides in 5-4 Decision States Can Impose Sales Tax on All Online Purchases

Phillip Dampier June 21, 2018 Consumer News No Comments

Keep in mind the state sales tax rate in some states does not include local sales and use taxes, which can often double the sales tax in some states. In New York, for example, the 4% state sales tax is joined by an average 4% local sales tax, which effectively means buyers pay an average 8% sales tax, varying with the jurisdiction.

The U.S. Supreme Court has given states a green light to begin imposing state and local sales taxes on all online purchases, regardless of where an internet retailer is located, ending a long-standing competitive advantage for online retailers.

In a 5-4 decision, the court sided with state tax authorities and brick and mortar retailers who argued it was unfair to collect sales tax from businesses with a physical presence while allowing shoppers to effectively bypass those taxes by shopping online. The decision decisively overturned a 1992 landmark ruling that allowed most internet purchases to avoid the automatic collection of sales tax, as long as a company did not maintain any offices or stores in a state where the buyer was located. Despite the earlier ruling, many states including New York never surrendered their right to collect sales tax on all online purchases, but were forced to rely on the honesty of state taxpayers to voluntarily disclose those purchases on tax forms — something few taxpayers did.

The decision is perceived as a significant blow to Overstock.com, Newegg.com, and Wayfair.com — three online retailers that went far beyond other online retailers to avoid charging sales taxes on most purchases. When states threatened to sue to impose sales taxes when retailers maintained commission and referral programs that paid in-state, third-party businesses to refer internet traffic to those retailers, many terminated affiliate relationships in certain states just to continue avoiding the collection of sales taxes.

Amazon.com, among the largest of all online retailers, was an early target of state taxing authorities. After years of fighting, Amazon conceded and gradually began collecting sales taxes for all 45 states that impose them. Amazon Marketplace purchases, sold by third-party vendors, were not charged sales tax. After today’s decision, most expect that will change soon.

The ruling will likely be a boon to state coffers, bringing each state an estimated $8-33 billion annually in new tax revenue and growing, according to one federal report. Research by Barclays found that states that rely the most on sales tax revenue to fund their budgets will benefit the most from the decision. Those states are Louisiana, Tennessee, South Dakota, Oklahoma and Alabama. Because states like New York, Illinois, and California already aggressively collect state sales taxes on many online purchases, the benefits to those states will likely be more modest.

The competitive advantage to online retailers who do not charge sales tax has gradually declined in many instances over the years because of dramatically higher shipping costs. Those shipping costs are not borne by brick and mortar stores, but they have always collected sales tax and face more expenses that online retailers do. Despite that, shortly after the decision was announced, investors punished exposed e-tailers including Overstock, Wayfair, and eBay with lower stock prices.

Some small businesses were relieved the Supreme Court decided to upheld the South Dakota law that exempted retailers with less than $100,000 in sales or 200 transactions annually from collecting that state’s 4.5 percent tax on purchases. Many are hoping state tax authorities will maintain similar exemptions for small internet businesses that would otherwise be faced with dramatic new costs collecting the correct state and local taxes and paying them to the appropriate tax authorities.

The decision was an unusual liberal-conservative split among the justices. Joining Justice Kennedy in the majority were three of his conservative colleagues, Justices Clarence Thomas, Samuel Alito and Neil Gorsuch, as well as liberal Justice Ruth Bader Ginsburg. Chief Justice John Roberts wrote for the dissenters, joined by liberal Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan.

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