For 50 years, the U.S. legal system has barred states from imposing sales tax on purchases their taxpayers make from out-of-state retailers. Today’s Supreme Court ruling in South Dakota v. Wayfair reverses that precedent by allowing states to require internet retailers to collect sales tax.
The 5-4 decision in this high-profile case comes after months of anticipation about which way the Court would rule. At issue was whether a physical presence is required in a state before a taxpayer is required to collect that state’s sales tax. The Court’s ruling clears the way for states to require out-of-state businesses to collect sales tax on sales in their states even if a business does not have a physical presence.
The explosion of internet sales was a significant argument that South Dakota made in this case. In 2016, the state passed a law requiring all but the smallest retailers, including internet companies, to collect sales tax, whether or not they had a physical presence in its state. After internet companies contested the decision, the case went to the Supreme Court.
The decision overrules a 1992 Supreme Court ruling, Quill Corp v. North Dakota, which stated that the Constitution bars states from requiring businesses to collect sales tax unless they have “a substantial connection” to the state.
For years, brick-and-mortar stores have complained they are at a disadvantage because they had to charge sales tax while their internet competitors did not. According to figures from the Texas Comptroller’s office, state officials estimate that Texas is missing out on more than $1 billion each year from online shopping sales tax; local governments in the state could gain as much as $200 million per year. With the rampant increase in internet sales each year, those estimates will only climb.
According to the nonpartisan Government Accountability Office, state and local governments could have collected up to $13 billion more in 2017 alone if they had been authorized to require sales tax payment from online sellers.
While 31 states have laws taxing internet sales, the Court’s decision specifically applies to South Dakota’s law. It is likely that states will study the ruling to determine whether they need to modify their own laws. Goldin Peiser & Peiser will continue to monitor the decision as states take up the matter.
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