SCOTUS Rules States Can Compel Online Retailers to Collect Sales Tax

On June 21, 2018 in the matter of South Dakota v .Wayfair et al., the U.S. Supreme Court overruled a ruling from 1992 that permitted online retailers to avoid sales tax collection responsibilities if they did not have a physical presence within a state.

In short, SCOTUS opined that the physical presence rule was flawed. For one, it provided a judicially-created tax shelter and businesses to avoid physical presence in multiple states. Additionally, the Court stated that the rule is outdated and then highlighted the significant revenue losses for the states because purchasers are not remitting use tax.

The South Dakota statute in question that has been upheld by SCOTUS requires any seller that makes sales of tangible personal property for delivery in South Dakota to collect and remit sales tax to South Dakota if either: (i) the seller’s gross sales from items delivered in South Dakota exceed $100,000; or (ii) the seller sells items for delivery into South Dakota in 200 or more separate transactions.

Justice Kennedy stated that the physical presence rule “produces an incentive to avoid physical presence in multiple States. Distortions caused by the desire of businesses to avoid tax collection means that the market may currently lack storefronts, distribution points, and employment centers that otherwise would be efficient or desirable. The Commerce Clause must not prefer interstate commerce only to the point where a merchant physically crosses state borders. Rejecting the physical presence rule is necessary to ensure that artificial competitive advantages are not created by this Court’s precedents . . . The physical presence rule it defines has limited States’ ability to seek long-term prosperity and has prevented market participants from competing on an even playing field.”

Chief Justice Roberts authored the dissent. “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. 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.”

Experts believe that Amazon stands to benefit from the ruling. It already collects sales tax on the products it sells directly.

The ruling does not clarify how the sales of third-party sellers on Amazon’s marketplace should be taxed and who should shoulder the collection burden.

Takeaway: While the decision may not have an immediate effect, other states are certain to follow suit and enact substantially similar legislation in order to increase state sales tax revenues collected from e-commerce companies. A common, standardized approach regarding how to tax online sellers and marketplace merchants will almost certainly become necessary in order to avoid a patchwork of state laws with different collection requirements and policies.

Richard B. Newman is a online advertising attorney at Hinch Newman LLP.  Email him at rnewman@hinchnewman.com. 

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