In late June, the U.S. Supreme Court ruled that online retailers can be required to collect sales taxes in states where they have no physical presence. The decision came in the case of South Dakota v. Wayfair, Inc. and represents a victory for brick-and-mortar stores as well as states that claimed they were losing billions of dollars in revenue.
The ruling effectively overturned a 1992 judgment in which the court ruled that states couldn’t require businesses to collect sales tax unless they had a physical presence in the state.
But as internet retailing grew, states began to feel the loss. Writing for the majority, Justice Anthony M. Kennedy said, “The Internet’s prevalence and power have changed the dynamics of the national economy.” Estimates suggest that states were losing out on sales tax revenues of $8 billion to $33 billion per year.
In 2016, South Dakota passed a law requiring all merchants to collect a 4.5 percent sales tax if they exceeded $100,000 in annual sales or had more than 200 transactions in the state. That law allowed them to test the Supreme Court’s readiness to review their position on state sales tax.
Thirty-one states already have online sales tax laws of some sort, but those with lower thresholds than South Dakota’s could still see their laws challenged in court.
Impact on consumers, businesses
For consumers, the shift means they’ll pay more for the things they buy online. Internet retailers will need to update their systems to accommodate an upcoming patchwork of state and local taxing districts. That likely won’t be a significant problem for large retailers and smaller sellers using well-established platforms such as Amazon and Etsy. But internet startups could suffer.
Overstock and Wayfair have both said the ruling would have little impact on their business. Amazon already collects state sales tax on direct purchases from its site, but the internet behemoth does not collect tax for items sold by third-party vendors, which account for about half the site’s total sales.
Advocates say the ruling is a win for states as well as brick-and-mortar retailers, who can now compete on a more level playing field. Critics suggest that the complexities of compliance could hinder entrepreneurism.