Supreme Court Ruling Opens Door to Online Sales Tax

Marco Green
June 22, 2018

Some retail leaders like former Office Depot CEO Steve Odland said the decision could raise prices for consumers by increasing sales taxes. "Clearing this hurdle puts Oklahoma in a position to collect much-needed new revenue to fund core government services". That was before the surge of online sales, and states have been seeking since then to find constitutional ways to collect tax revenue from remote sellers into their state.

"Each year the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the States". Legislative action has been stalled while the Supreme Court was deciding this case. But state's were missing out on big bucks if there was no physical store.

As an example, lawyers for the online retailers told the high court that in IL, a Snickers bar costs more in taxes than a Twix bar, since food items containing flour are not treated as candy for tax purposes.

In a ruling that could benefit Nebraska and Iowa tax coffers, the U.S. Supreme Court says states can force online shoppers to pay sales tax.

The court was split 5-4-albeit not on conservative versus liberal leanings-regarding the decision.

The ruling opens the door for some New Hampshire-based retailers to be forced to collect sales tax from online customers living in other states.

The court said that law effectively incentivized businesses to "avoid physical presence" in states and led to "a judicially created tax shelter".

The background: A 1992 court decision exempted retailers who lacked a physical presence in a state, such as catalog merchants, from paying sales taxes. Kennedy said that position was archaic, "unsound and incorrect" in the internet age. "Statutes of this sort are likely to embroil courts in technical and arbitrary disputes about what counts as physical presence", Justice Anthony Kennedy said in the opinion.

Thursday's ruling paves the way to change that approach and require online retailers to collect sales taxes rather than putting that responsibility on the consumer.

"Will states step forward and pass laws similar to South Dakota?" asked Annette Nellen, director of the Masters in Science in Taxation program at San Jose State University, on Thursday.

State and local governments had grown increasingly agitated as sales from brick and mortar retailers gave way to online retail, which now comprises approximately 9.5% of the dollar value of total purchases. And, if some small businesses with only de minimis contacts seek relief from collection systems thought to be a burden, those entities may still do so under other theories.

The court decision was praised by Florida business groups. South Dakota took him up on the suggestion. Note that consumers who live in one of the five states without a sales tax...

"I've seen estimates of up to two-thirds or three-quarters of online sales today are subject to sales tax because we've had these piecemeal ... agreements between individual states and individual retailers", he said. This overturns a decision from 1992 that mandated that states could levy taxes on businesses only if they had a brick-and-mortar presence within that state's borders. North Dakota, many companies didn't have to collect sales taxes.

Watch for this story to be updated later Thursday with reaction from the bike industry.

Other reports by Click Lancashire

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