Supreme Court Rules On Online Sales Tax

Most likely you have bought something online in the last year, a gift, furniture, clothes, or something small.  The online retail market has grown exponentially in the last few years and is expected to pass the trillion-dollar mark by 2019.  As a result, forty-five states and local governments are missing out on billions of tax dollars annually. The Supreme Court has sided in favor of states who are trying to collect sales tax from online retailers. 

In the 5-4 ruling, South Dakota’s standing law that allows the state to apply its sales tax to major online retailers, with no physical presence in the state, was upheld in the Supreme Court. This high court rule was previously tested in 1967 and again in 1992.  They decided that if a company lacked the physical presence in a state, they were not required to collect sales tax. The decision expands the state’s ability to pull in tax dollars from online purchases, which could have a significant impact on small businesses. Three of the nation’s largest online retailers (Wayfair, Newegg, and Overstock) challenged the state’s law.

States have used their best efforts to collect taxes on residents’ out-of-state purchases even though they are hindered by Supreme Court rulings and the Internet Tax Freedom Act.  Almost half of the states have defined physical presence as including any website affiliated with the company.  Ten of the remaining states, first being Colorado, have required that out-of-state sellers notify buyers and states of the unpaid sales taxes.  The Supreme Court in 2015 unanimously upheld Colorado’s law requiring those notices and reports.

Many of the top 20 online sellers have local warehouses, showrooms, or laws that already require them to collect taxes in most of the states already.  The top 100 retailers pay about 90% of the state taxes owed, so they do not have much to worry about with the change.  The recent Supreme Court decision is going to affect smaller online retailers such as eBay sellers and Etsy retailers. The response to the U.S. Supreme Court’s ruling has varied, especially among business owners.  State government agencies have welcomed the decision because it is a boom for their revenue base as well as acting as a playing-field equalizer.