The U.S. Supreme Court has ruled that states can require online retailers to collect state sales taxes on goods delivered to their residents and businesses. Previously, states only had the power to force retailers to collect such taxes when the retailer had a physical location in the state. Some experts believe the ruling could have as big an impact as last year’s Tax Cuts and Jobs Act because it levels the playing field between online and brick-and-mortar enterprises.
Large online retailers like Amazon and those with physical locations have already been collecting sales taxes. For example, Amazon not only collects sales taxes on its own inventory but also on a portion of sales by third-parties who sell merchandise through the site. Large retailers like Wayfair.com and Overstock, which brought the suit against the state of Idaho, told Reuters that the ruling will have little impact on their businesses.
Smaller online businesses will be affected most. Small businesses and startups could face a serious burden as they attempt to comply with the sales tax regimes of 50 states, Washington, D.C., U.S. territories like Puerto Rico, and some 10,000 local tax jurisdictions in the U.S. alone. The compliance burden is likely to result in at least a marginal uptick in online prices.
However, the ruling does resolve the competitive disadvantage experienced by retailers that have both physical locations and online outlets.
In the 5-4 ruling, the majority reasoned that it was unjust to treat retailers differently depending on whether they had a physical presence in the state.
“It is unfair and unjust to those competitors, both local and out of state, who must remit the tax;” wrote Justice Anthony Kennedy, “to the consumers who pay the tax; and to the states that seek fair enforcement of the sales tax, a tax many states for many years have considered an indispensable source for raising revenue.”
The majority also noted that the alternative to having online retailers collect these taxes is for consumers to calculate and pay them on their own. Since consumers rarely do this, states lose an estimated $8 billion to $33 billion each year.
An unusual group of justices opposed the ruling. Chief Justice John Roberts penned a dissent, joined by Justices Sonia Sotomayor, Elena Kagan and Stephen Brayer. It primarily argued that Congress, rather than the courts, should be the one to decide how such a large sector of the economy should be treated for tax purposes, especially because any change in the rules adds a compliance burden to businesses.
The dissent went on to argue that the ruling places a heavy compliance burden on Mom & Pop businesses that have otherwise been able to thrive online.