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Supreme Court rules states can force online shoppers to pay sales tax

June 21, 2018

The Supreme Court says states can force online shoppers to pay sales tax.

In essence, under the Supreme Court's 5-4 ruling Thursday, states can pass laws requiring sellers without a physical presence in the state to collect the state's sales tax from customers and send it to the state.

The ruling is a win for states, including Indiana, who said they were losing out on billions of dollars annually under two decades-old Supreme Court decisions that impacted online sales tax collection.

The high court ruled Thursday to overturn those decisions. They had resulted in some companies not collecting sales tax on every online purchase. The cases the court overturned said that if a business was shipping a product to a state where it didn't have a physical presence such as a warehouse or office, the business didn't have to collect the state's sales tax. Customers were generally supposed to pay the tax to the state themselves if they don't get charged it, but the vast majority didn't.

The decision appears to open the door for Indiana to expand sales tax collections for online purchases. It was among 35 states that supported the legal bid from South Dakota to collect sales taxes from out-of-state internet retailers. Indiana already has made agreements with nearly 2,000 companies, including Amazon, to collect some online sales tax.

An Indiana law passed in 2017 laid the ground work for the state to collect online sales taxes. Lawmakers anticipated that the issue would require clarity from courts.

State officials did not immediately respond to IBJ's request for comment on Thursday about how the decision specifically would affect Indiana. In a media release, Gov. Eric Holcomb said, "We’re taking a careful look at the ruling to better understand its implications for Indiana.”

"A lot about our world and economy has changed in the 26 years since our nation’s highest court last ruled on this issue. With the incredible evolution of technologies and the growth of internet sales, this Supreme Court ruling will help level the playing field between our Hoosier-based companies that operate retail stores and out-of-state companies that sell products and services online in our state," Holcomb said.

Bill Waltz, vice president of taxation and public finance for the Indiana Chamber of Commerce, hailed the decision.

"It will further level the playing field between in-state brick-and-mortar retailers and their online competitors, while also boosting Indiana’s sales tax base," Waltz said. "For years, this situation has resulted in substantial loss of revenue to states, thus increasing the tax burden on those who do pay the taxes they owe.

"We applaud state legislators who took the initiative in the 2017 Indiana General Assembly to prepare for this hoped-for decision. That legislation, which the Indiana Chamber strongly supported, has our state perfectly poised to fully implement an online sales tax law and trigger the tax collection.”

Justice Anthony Kennedy wrote that the previous decisions were flawed.

"Each year the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the States. These critiques underscore that the physical presence rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause," he wrote.

In addition to being a win for states, the ruling is also a win for large retailers, who argued the physical presence rule was unfair. Retailers including Apple, Macy's, Target and Walmart, which have brick-and-mortar stores nationwide, generally collect sales tax from their customers who buy online. That's because they typically have a physical store in whatever state the purchase is being shipped to. Amazon.com, with its network of warehouses, also collects sales tax in every state that charges it, though third party sellers who use the site to sell goods don't have to.

But sellers that only have a physical presence in a single state or a few states could avoid charging customers sales tax when they're shipping to addresses outside those states. Online sellers that don't charge sales tax on goods shipped to every state range from jewelry website Blue Nile to pet products site Chewy.com to clothing retailer L.L. Bean. Sellers who use eBay and Etsy, which provide platforms for smaller sellers, also aren't required to collect sales tax nationwide.

The case the court ruled in has to do with a law passed by South Dakota in 2016. South Dakota's governor has said his state loses out on an estimated $50 million a year in sales tax that doesn't get collected by out-of-state sellers. Lawmakers in the state, which has no income tax, passed a law designed to directly challenge the Supreme Court's 1992 decision. The law required out-of-state sellers who do more than $100,000 of business in the state or more than 200 transactions annually with state residents to collect sales tax and turn it over to the state.

South Dakota wanted out-of-state retailers to begin collecting the tax and sued several of them: Overstock.com, electronics retailer Newegg and home goods company Wayfair. The state conceded in court, however, that it could only win by persuading the Supreme Court to do away with its physical presence rule.

The Trump administration had urged the justices to side with South Dakota.

The National Retail Federation trade group, said in a statement that the court's decision was a "major victory" but the group said federal legislation is necessary to spell out details on how sales tax collection will take place, rather than leaving it to each of the states to interpret the court's decision.

Chief Justice John Roberts and three of his colleagues would have kept the court's previous decisions in place. Roberts wrote that Congress, not the court, should change the rules if necessary.

"Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress," Roberts wrote in a dissent joined by Justices Stephen Breyer, Elena Kagan and Sonia Sotomayor.

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