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States will be able to charge sales tax on online purchases thanks to the Supreme Court

Jonathan Shieber

In a five-to-four decision issued today, the Supreme Court ruled that states can make online businesses collect sales taxes -- even if they don't have a physical presence in that state.

Today's ruling overturns a decision from the Court in 1992 that paved the way for the explosion of online retail in the United States.

Important Tax Cases: Quill Corp. v. North Dakota and the Physical Presence Rule for Sales Tax Collection


At issue was the Quill Corp. v. North Dakota decision, which ruled that companies need to have at least some physical connection with a state for that state can require that company to pay taxes.

Today's ruling caused publicly traded e-commerce companies share prices to tumble, with Shopify, Etsy, Amazon, eBay, Alibaba all recording losses in midday trading on their respective U.S. exchanges.

It's a huge win for vendors with physical storefronts which have long argued that their online counterparts enjoyed an unfair advantage since they didn't have to charge customers local sales tax. Local governments may also see a windfall as a result of the ruling, since the government estimates that between $9 billion and $13 billion in potential tax revenue is left on the table, thanks to earlier Supreme Court decisions on the taxation of online purchases.

Writing for the majority, Justice Anthony Kennedy said:

"Remote sellers can avoid the regulatory burdens of tax collection and can offer de facto lower prices caused by the widespread failure of consumers to pay the tax on their own. This “guarantees a competitive benefit to certain firms simply because of the organizational form they choose” while the rest of the Court’s jurisprudence “is all about preventing discrimination between firms.” ... In effect, Quill has come to serve as a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a State’s consumers—something that has become easier and more prevalent as technology has advanced."

While the ruling opens the door for states to collect taxes from online businesses, there're some significant outstanding questions now that the court has made its decision.

First, the court did not rule out the possibility that states may not collect taxes on all online purchases, given the negligible size of some transactions. And the court didn't say whether states could retroactively seek sales taxes.

That's a big issue, considering that e-commerce sales in the U.S. were $435.5 billion last year, vs. $180 billion in mail-order sales in 1992 when the court issued its first ruling on interstate sales and taxes.

For most large online retailers (including Amazon -- the country's largest), the decision will have little impact, since they've been voluntarily paying state sales taxes for years. Instead, the burden will be on earlier stage companies that don't have the same sort of scale and who will be facing more operational costs as a result.

"Generally of the opinion that it’s not going to have a major impact on the larger e-commerce companies as many have already been collecting state sales tax for years," wrote one venture capital investor whose firm is heavily invested in e-commerce. "The burden is going to higher on SMBs because of the admin work required for each state — there is /will be software to simplify this, but nonetheless the impact is going to be greater on the smaller/high growth e-commerce companies," the investor said.

Chief Justice John Roberts agrees. In his dissenting opinion, Roberts wrote:

The burden will fall disproportionately on small businesses. One vitalizing effect of the Internet has been connecting small, even “micro” businesses to potential buyers across the Nation. People starting a business selling their embroidered pillowcases or carved decoys can offer their wares throughout the country—but probably not if they have to figure out the tax due on every sale. See Sales Taxes Report 22 (indicating that “costs will likely increase the most for businesses that do not have established legal teams, software systems, or outside counsel to assist with compliance related questions”). And the software said to facilitate compliance is still in its infancy, and its capabilities and expense are subject to debate.