WASHINGTON — Overturning a 1992 decision, the Supreme Court has ruled that states and local governments can collect sales tax from online sellers that do not have a physical presence in the state. The decision was hailed by several retail industry groups for creating a more level playing field for brick-and-mortar retailers.
The court’s ruling reversed the decision rendered in Quill Corp. v. North Dakota that exempted online retailers from the responsibility to collect taxes in states where they did not have physical facilities. At that time, the internet was in its infancy and online retailing still in an embryonic state. Consequently, the lost tax revenue — largely from catalog sales then — was insignificant compared to the sums collected from traditional retailers.
Estimates of how much additional revenue states and local governments will now be able to collect given their increased taxing authority vary widely, from $8 billion to $23 billion a year.
“The physical presence rule has long been criticized as giving out-of-state sellers an ad-
vantage,” the court declared in its ruling. “Each year, it becomes further removed from economic reality and results in significant revenue losses to the states …
“Quill creates rather than resolves market distortions. In effect, it is a judicially created tax shelter for businesses that limit their physical presence in a state but sell their goods and services to the state’s consumers, something that has become easier and more prevalent as technology has advanced.”
The 5-4 decision was rendered by Justices Samuel Alito, Ruth Bader Ginsburg, Neil Gorsuch, Anthony Kennedy and Clarence Thomas, with John Roberts, Stephen Breyer, Sonia Sotomayor and Elena Kagan dissenting. In upending Quill Corp. v. North Dakota, the ruling upheld a 2016 South Dakota law that requires online retailers to collect a 4.5% sales tax in states where they have more than $100,000 in annual sales to state residents or complete 200 transactions.
“Retailers have been waiting for this day for more than two decades,” says Matthew Shay, president and chief executive officer of the National Retail Federation (NRF) 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 “The retail industry is changing, and the Supreme Court has acted correctly in recognizing that it’s time for outdated sales tax policies to change as well.
“This ruling clears the way for a fair and level playing field where all retailers compete under the same sales tax rules whether they sell merchandise online, in-store or both.”
In a friend-of-the-court brief filed last year, NRF argued that the 1992 decision was outdated because the same technological progress that has triggered the explosive growth of online retailing in recent years has also made sales tax collection much less of a burden. The trade organization pointed to the wide variety of software options available — many free or low in cost — that automatically collect sales tax owed.
The court’s decision does not directly affect Amazon.com, the largest online retailer, since it already collects taxes in all states with a sales tax. However, Amazon, eBay and other online marketplaces may be required by states to collect tax on behalf of third-party sellers who use their platforms. A number of states have already passed laws requiring companies that provide platforms for third-party sellers to collect sales tax on those transactions rather than passing responsibility on to the sellers.