Arthur J. Villasanta – Fourth Estate Contributor
Washington, DC, United States (4E) – Americans will soon pay a lot more for their online purchases after the U.S. Supreme Court yesterday ruled that states can force more customers to pay sales taxes when they buy online.
The Supreme Court’s 5-4 decision overruled a pair of decades-old precedents, which states claim cost them billions of dollars in lost revenue annually. The ruling affects more than 40 states that asked the high court for action. Five states that don’t charge sales tax won’t be affected by the ruling.
Online buyers will start paying more this upcoming holiday season as a result of the ruling. States stand to earn a bundle from this decision, which was triggered in 2016 by a South Dakota lawsuit. At the time, South Dakota claimed it was losing an estimated $50 million a year in sales taxes not collected by out-of-state sellers.
Lawmakers in the South Dakota passed a law in 2016 designed to directly challenge the physical presence rule. The South Dakota law requires out-of-state sellers who do more than $100,000 worth of business in the state (or more than 200 transactions annually with state residents) to collect sales taxes and send it to the state.
The physical presence rule states that if a business ships a customer’s purchase to a state where the business doesn’t have a physical presence (such as a warehouse or office), the business didn’t have to collect sales taxes for the state. Customers were generally responsible for paying the sales tax to the state themselves if they weren’t charged it, but most didn’t realize they owed it and few paid. The new Supreme Court ruling overturned this doctrine.
Justice Anthony Kennedy said the precedents were flawed. “Each year the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the States,” said Kennedy. He said the rule “limited States’ ability to seek long-term prosperity and has prevented market participants from competing on an even playing field.” He was joined in this opinion by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito and Neil Gorsuch.
Apart from consumers, the other big loser from this ruling are online-only retailers, especially the smaller ones. These retailers will face enormous problems complying with different state sales tax laws. The Small Business & Entrepreneurship Council advocacy group said, “Small businesses and internet entrepreneurs are not well served at all by this decisiona
The ruling, however, is a big win for big chains such as Amazon.com with a presence in many states. These bif retailers usually collect sales taxes on online purchases. Now, big chain rivals (especially online-only retailers) will be charging sales tax where they didn’t before.
Big chains have been collecting sales tax nationwide because they typically have physical stores in a state where a purchase is being shipped to. Amazon.com also collects sales taxes in every state that charges it.
The ruling also means that states can pass laws requiring out-of-state sellers to collect the state’s sales tax from customers and send it to the state. More than a dozen states adopted laws to this effect ahead of the court’s decision. Retail trade groups praised the ruling, saying it levels the playing field for local and online businesses.
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