The Supreme Court agreed Friday to wade into the issue of sales tax collection on internet purchases in a case that could force consumers to pay more for certain purchases and allow states to recoup what they say is billions in lost revenue annually.
Under previous Supreme Court rulings, when internet retailers don’t have a physical presence in a state, they can’t be forced to collect sales tax on sales into that state. Consumers who purchase from out-of-state retailers are generally supposed to pay the state taxes themselves, but few do. A total of 36 states and the District of Columbia had asked the high court to revisit the issue.
Large brick-and-mortar retailers like Walmart and Target have long bemoaned the fact that they have to collect sales tax on online purchases because they have physical stores nationwide. Meanwhile, smaller online retailers, who don’t have vast networks of stores, don’t have to collect the tax where they don’t have a physical presence.
Internet giant Amazon.com fought for years against collecting sales tax but now does so nationwide, though third-party sellers on its site make their own decisions. But the case before the Supreme Court does directly affect other online retailers, including Overstock.com, home goods company Wayfair and electronics retailer Newegg, who are part of the case the court accepted.
States say the court’s previous rulings have also hurt them. According to one estimate cited by the states in a brief they filed with the high court, they’ll lose out on nearly $34 billion in 2018 if the Supreme Court’s previous rulings stand. The Government Accountability Office, which provides nonpartisan reports to Congress, wrote in a report last year that state and local governments would have been able to gain between $8.5 billion and $13 billion in 2017 if they could require out-of-state sellers to collect tax on sales into the state. All but five states charge a sales tax.
The Supreme Court first adopted its physical presence rule on sales tax collection in a case dealing with catalog retailers in 1967, a year that states pointed out in their brief was “two years before the moon landing and decades before” the first online retail transaction. The high court last considered the issue in 1992.
The National Retail Federation, which represents both internet and brick-and-mortar sellers, said Friday it welcomed the Supreme Court’s decision to take the case.
“Unfortunately, antiquated sales tax collection rules have resulted in an uneven playing field that’s making it harder for Main Street retailers to compete in today’s digital economy. This is a basic question about fairness, which all of our members deserve whether they’re selling in stores or online,” federation president Matthew Shay said in a statement.
The case the Supreme Court agreed to hear Friday comes from South Dakota, which has no state income tax and relies on retail sales and use taxes for revenue. In 2016, South Dakota lawmakers passed a law requiring out-of-state sellers to collect and turn over sales tax to the state. The state’s highest court struck down the law, citing previous Supreme Court decisions.
Overstock.com said in a statement Friday that it “looks forward to the opportunity to convince the Supreme Court to confirm its prior rulings protecting the free flow of interstate commerce from overreaching state tax laws.”
The Supreme Court will probably hear arguments in the case in April.