WASHINGTON — States can collect sales tax from online sellers even if those companies don’t have a physical presence in the state, the Supreme Court ruled last month in a case with far-reaching implications for online commerce.
“The physical presence rule has long been criticized as giving out-of-state sellers an advantage,” the court said in its 5-4 ruling. “Each year, it becomes further removed from economic reality and results in significant revenue losses to the states.”
The court’s decision overturned a ruling from 1992 in Quill Corp. v. North Dakota that allowed online retailers to skirt sales tax collection responsibilities in states where they don’t have a physical presence.
Brick-and-mortar retailers and others have long argued that the 1992 law was established with catalog sales in mind, and before the meteoric rise of internet retailing. State governments entered the fray, asserting that since the sales tax is a long-established way for state governments to pay for the services their constituents demand, it’s unfair to allow some retailers to skip it.
“Quill established two different sets of rules governing the collection of sales taxes that left traditional retailers badly disadvantaged against their online peers. Today’s ruling sets the stage for states to begin leveling the playing field for brick-and-mortar retailers by treating online transactions in the same way they treat in-person ones,” said Andrew Harig, senior director of tax, trade and sustainability at the Food Marketing Institute. “The Supreme Court’s decision is an important victory for FMI members and puts us on a path that will allow for the creation of a balanced, consumer-driven and competitive marketplace.”
Justices Anthony Kennedy, Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito and Neil Gorsuch delivered the opinion, while John Roberts, Stephen Breyer, Sonja Sotomayor and Elena Kagan dissented.
“Quill creates rather than resolves market distortions,” the ruling said. “In effect, it is a judicially created tax shelter for businesses that limit their physical presence in a state but sell their goods and services to the state’s consumers, something that has become easier and more prevalent as technology has advanced.”
Although it is the poster child for e-commerce, Amazon.com wasn’t involved in the lawsuit, and today’s decision doesn’t directly affect the Seattle company, which already collects taxes in every state that has a sales tax.
But in the wake of the ruling, Amazon, eBay, Etsy and online marketplaces will have to keep an eye on how each state handles sales tax legislation and whether they will have to collect the funds on behalf of third-party sellers. Several states have passed legislation forcing a company that provides the platform for sellers to collect sales tax rather than asking the seller to do so.
“This ruling clears the way for a fair and level playing field where all retailers compete under the same sales tax rules,” said Matthew Shay, president and chief executive officer of the National Retail Federation.