U.S. Markets closed

Some of the stuff you buy online is about to get more expensive

Krystal Hu
Reporter

The U.S. Supreme Court ruled on Thursday internet retailers can be required to collect sales taxes in states where they have no physical presence. With e-commerce accounting for about 9.5% of retail sales in the U.S., the decision may affect your next online order.

If you’ve enjoyed some tax-free shopping online, you will likely have to pay more for those items. Big online retailers like Wayfair (W) and Overstock (OSTK) will likely be required to collect sales taxes in every state. GlobalData Retail estimates the additional costs for consumers could be up to $15.2 billion a year.

However, Amazon (AMZN), which dominates the online shopping space, is expected to stay largely unaffected. This is because Amazon has already been collecting sales tax for its own products in most U.S. states where the e-commerce giant has warehouses and fulfillment centers.

This may not be the case for third-party sellers on Amazon marketplace, which account for nearly half of its total sales. Some sellers haven’t been taxed in certain states, thus consumers may find they’re exempt from sales tax when they order from Amazon.  

With the Supreme Court decision in this case, South Dakota v. Wayfair, those third-party retailers may have to start collecting sales tax. Retailers are already operating on thin profit margins, so it’s likely consumers will absorb the costs in the form of higher prices. Those higher prices for customers may or may not hurt Amazon itself.

Source: Wikimedia Commons

“As Amazon has continued to thrive despite losing the obvious pricing benefit it used to have from not collecting sales taxes in its proprietary business, it remains to be seen if this new ruling will have any real impact on its third-party sales, or if the convenience for shoppers and growing benefits to Prime members will mitigate the pricing shift,” said Charlie O’Shea, Moody’s lead retail analyst, in a statement.

A blow to smaller online retailers

The ruling is a win for brick-and-mortar retailers that have long asked for a level playing field. Physical and omni-channel retailers like Walmart (WMT) already charge and remit sales tax in most states since they have a national physical presence across the nation.

While large online retailers have the resources to cope with collecting sales tax, smaller individual sellers on Amazon marketplace and other platforms may have a hard time complying with the court decision. There are over 10,000 tax jurisdictions across the U.S. because of county and city taxes.

“The challenge for smaller players will be significant and the concern here is that complexity could stymie innovation and entrepreneurialism,” said Neil Saunders, managing director of GlobalData Retail. He expects most states will likely exempt smaller players that sell less than $100,000 of goods or services into the state or they could escape scrutiny because of the scale.

The court’s opinion didn’t address the new burden placed on small online sellers but mentions that technology solutions could contain the costs of compliance. “Those systems may well become available in a short period of time, either from private providers or from state taxing agencies themselves. And in all events, Congress may legislate to address these problems if it deems it necessary and fit to do so,” according to the majority opinion, which was written by Justice Anthony Kennedy.

Amazon, for example, has already developed systems to collect and remit sales tax on behalf of third-party sellers. It has been doing so in Washington since this year, after the state passed a law mandating the collection of online sales taxes from retailers that do not have a physical presence in the state. With the Supreme Court’s opinion in place, more states may pass laws like Washington’s.

The court’s 5-4 ruling overturned a 1992 decision called Quill v. North Dakota, which had ruled that states couldn’t force out-of-state retailers to collect sales tax unless they had a physical presence in the states. 

The Supreme Court’s decision Thursday sided with South Dakota, which had enacted a law requiring all retailers, even those without a physical presence, to collect sales tax if they had more than $100,000 in annual sales or conducted more than 200 transactions in the state every year.

The latest decision acknowledges that there has been a “complete revolution in the way we buy and sell things” since the court’s 1992 ruling, according to Natasha Varyani, a visiting professor at New England Law.

“I think it has brought sales tax in line with other kinds of taxes and yes,” she said, “it is very much a response to the way we do business now.”

Krystal Hu covers technology and economy for Yahoo Finance. Follow her on Twitter.

Read more:

Small businesses will be the losers in the Supreme Court’s online sales tax case

Amazon and Whole Foods clash over products like Coca-Cola

Almost half of Amazon Prime members we surveyed say they’ll drop the service, but the company will be fine