Supreme Court Paves Way for Online Sales Tax Collection

The U.S. Supreme Court has ruled that states may collect sales taxes on most internet transactions, potentially opening up the floodgates for states to enact and enforce online sales tax laws and collect a windfall estimated at billion annually.

The vote was 5 to 4 in South Dakota v. Wayfair Inc. Justice Anthony Kennedy wrote the majority opinion. He had signaled in previous cases that he thought the original decision to prohibit the collections was outdated in an era when e-commerce sales make up 9 percent of U.S. retail sales at more than $114 billion, according to the U.S. Census Bureau. He was joined by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito and Neil Gorsuch.

The ruling overturned a 1992 high court case, Quill Corp. v. North Dakota, which involved sales of floppy disks, highlighting how outdated the law was. The old ruling required a retailer to have a physical presence in the state.

Kennedy said not collecting taxes on online sales disadvantaged traditional, physical 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.”

In his dissent, Chief Justice John Roberts did not dispute that times had changed, but he wrote that the high court should have left the decision to Congress.

At least nine states had bills in their legislatures this year that would facilitate the collection of sales taxes on remote purchases, according to the National Conference of State Legislatures. They were Georgia, Hawaii, Idaho, Iowa, Kansas, Nebraska, New Mexico, New York and Oklahoma. Last year, a dozen states took action that would allow online sellers to collect remote sales taxes and then pay the state.

Amazon, the largest online retailer, already collects sales taxes on its direct sales. But it does not do so for third-party sellers on its site.

NCSL President Sen. Deb Peters, a South Dakota Republican who authored the state’s remote sales tax legislation at issue in the court, said in a statement that the decision is “a victory for main street America.”

“Brick and mortar stores will no longer be penalized for collecting the tax revenues that fund our schools, infrastructure, and the vital public services that state and local governments provide,” she said. “For states, today is just the beginning. We’ve waited 26 years.”