A divided Supreme Court ruled this morning that states may require online retailers to collect billions of dollars of sales tax revenue owed to them.
The decision was 5 to 4.
More than 40 states and the Trump administration asked the Supreme Court to overturn its 1992 decision in Quill v. North Dakota that restricts states from collecting sales tax from retailers without a physical presence in those states. They said a decision in a case involving mail-order catalogues is obsolete in an era of e-commerce.
Justice Anthony M. Kennedy, who wrote Thursday’s majority decision, had earlier called for the court to reconsider the decision.
Kennedy wrote that dramatic technological changes had made the court’s previous ruling obsolete, and that it unfairly disadvantaged traditional brick and mortar stores.
“A virtual showroom can show far more inventory, in far more detail, and with greater opportunities for consumer and seller interaction than might be possible for local stores,” Kennedy wrote.
“Yet the continuous and pervasive virtual presence of retailers today is, under Quill simply irrelevant. This court should not maintain a rule that ignores these substantial virtual connections to the state.”
He was joined by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel A. Alito Jr. and Neil M. Gorsuch.
Chief Justice John G. Roberts Jr. wrote the dissent. He said the court should not be doing the work of Congress, even if its earlier precedents are open to question.
“E-commerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical-presence rule,” he wrote.
“Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress. The court should not act on this important question of current economic policy, solely to expiate a mistake it made over 50 years ago.”
South Dakota brought the challenge. It passed a law requiring retailers with more than $100,000 in annual sales or 200 transactions in the state to pay a 4.5 percent tax. Although technically consumers are required to pay sales tax on all purchases, it is practically impossible to collect without the retailer applying it at the point of sale.
A Government Accountability Office audit said states missed out on about $13.7 billion in tax revenue in 2017.
Retailers said overturning Quill would allow states to go far beyond the model legislation that South Dakota passed, requiring collection by retailers with a single sale in a state or perhaps trying to force the companies to comply retroactively.
Congress, the retailers argued, could implement national rules rather than open up the companies to having to deal with the specific requirements of what they say are 12,000 taxing jurisdictions nationwide.
They also said it was a problem that was shrinking rather than expanding.
“Stopping state regulatory and tax power at each state’s border should be the default rule for online commerce,” said Jessica Melugin, of the Competitive Enterprise Institute, which supported online retailers who did not want to collect taxes for each state.
“It is essential that Congress now clarify and reinforce the principles of physical presence and state tax competition to protect online commerce, smaller online businesses, and consumers. Hopefully, this unfortunate decision is the call to action that members of Congress need to provide these critical parameters for economic freedom.”
More retailers are collecting, including 19 of the 20 largest, regardless of whether they have a physical presence in the state, according to briefs filed in the case. Included in that group is Amazon, as well as Walmart, Target and Apple.
Three large retailers — Wayfair, Overstock and Newegg — do not, and South Dakota sued them for failing to collect taxes after the state’s law went into effect.
“Retailers have been waiting for this day for more than two decades,” National Retail Federation President Matthew Shay said in a statement. “The retail industry is changing, and the Supreme Court has acted correctly in recognizing that it’s time for outdated sales tax policies to change as well.”
Although in the past Americans may have purchased online to avoid paying sales tax, they are increasingly shopping online to get items quickly and without having to leave the house, retail experts say.
The case is South Dakota v. Wayfair.
(c) 2018 The Washington Post