Supreme Court rules that internet businesses must collect all state and local sales taxes

The Supreme Court on Thursday ended a dispute as old as the internet, ruling that all online sales are subject to the same state and local sales taxes that are collected on purchases at brick-and-mortar retailers.

The decision will inject billions of dollars into state coffers, but also increase prices for many online shoppers.

By a 5-4 vote, the justices overturned past rulings that had shielded internet sellers from collecting taxes from customers in states where they had no stores, warehouses or other physical presence.

Instead, the justices — addressing an issue that Congress has for years failed to resolve — brought internet commerce into line with the taxing rules that apply to mall shops, big box stores and other traditional retailers.

Justice Anthony M. Kennedy, speaking for the court, said it was not fair to allow remote sellers to escape the duty to collect and remit sales taxes.

“It is unfair and unjust to those competitors, both local and out of state, who must remit the tax; to the consumers who must pay the tax; and to the states that seek fair enforcement of the sales tax — a tax many states for many years have considered an indispensable source for raising revenue,” he wrote in South Dakota vs. Wayfair.

The court was split along unusual lines. Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel A. Alito Jr. and Neil M. Gorsuch formed the majority.

In dissent, Chief Justice John G. Roberts Jr. said the court should have waited for Congress to decide the issue. He said Congress has the power to regulate interstate commerce, and changing the tax rules state-by-state has “the potential to disrupt the development of such a critical segment of the economy.” Justices Stephen G. Breyer, Sonia Sotomayor and Elena Kagan agreed.

The National Conference of State Legislatures called the ruling “a victory for Main Street America. Brick-and-mortar stores will no longer be penalized for collecting the tax revenues that fund our schools, infrastructure and the vital public services that state and local governments provide,” said South Dakota state Sen. Deb Peters, the group’s president.

Matthew Shay, president of National Retail Federation, said, “Retailers have been waiting for this day for more than two decades.… This ruling clears the way for a fair and level playing field where all retailers compete under the same sales tax rules whether they sell merchandise online, in-store or both.”

The ruling may pose a headache for small-scale web merchants who will have to keep track of and remit sales taxes for thousands of jurisdictions.

Jonathan Johnson, an executive for Overstock.com, which had joined the suit against the South Dakota tax law, said Congress should pass legislation “to lessen the potential impact of today’s ruling on internet innovation.”

The court’s opinion left unanswered several questions, including whether very small businesses which make only a few sales online can be forced to remit taxes for all the states.

Tax experts say better software has made it easy to quickly calculate the exact rates for each locale, and many states have devised a “streamlined” filing system, in which a single state office collects and dispenses taxes for its counties and cities.

Kennedy cited a Commerce Department estimate that online retail sales were $453 billion in 2017. He said the outdated “physical presence” rule was costing states and localities between $8 billion and $33 billion a year in lost revenue. Earlier this year, California tax officials estimated the state could take in an extra $2 billion a year if they could collect taxes on all internet sales.

It is the second court decision in two months that could result in higher revenue for states. Last month, the justices struck down the federal ban on sports betting. Many states are now expected to license betting on sports, and recoup tax revenue from it. But doing so will require new state laws.

The same may be true for internet sales taxes.

“Each state is different, and some will need to pass new laws,” said Max Behlke, a budget and tax policy expert in Washington for the group representing state legislatures. “I don’t think most states will be able to do this in 60 days.”

Paul Cambra, a spokesman for the California Department of Tax and Fee Administration, said the state is deciding how to proceed. “We are meeting to review the decision and determine our next steps,” he said.

Legal experts said many state tax laws were written with the assumption that only businesses with a physical presence in the state were subject to collecting and remitting sales taxes.

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In 1992, during the era of mail-order catalogs, the Supreme Court ruled it was unconstitutional for states to demand that out-of-state sellers collect and remit sales taxes on all purchases. The court said then, in Quill vs. North Dakota, that states could not extend their taxing authority to companies that had no stores, warehouses or “physical presence” within the state.

At issue then, and now, was whether taxing out of state companies violated the Constitution by discriminating against interstate commerce.

Only Justices Kennedy and Thomas were on the court then, and both said Thursday they regretted the earlier ruling. Only Justice Byron White dissented in 1992, Thomas said, adding “I should have joined his opinion.”

With the explosion in online shopping, lawyers for South Dakota and 41 other states urged the high court this year to revisit the issue.

While Amazon and other large online retailers now regularly collect sales taxes on all purchases, many others have refused to do so. They argued it is an unfair and heavy burden to require them to collect varying taxes charged by more than 10,000 jurisdictions across the country.

However, traditional stores and shop owners said it was unfair that they had to collect sales taxes on each purchase, while their customers had the option to buy the same product online and avoid paying the tax.

Last year, the Government Accounting Office estimated that state and local governments were collecting 75% to 80% of the taxes they are owed from “remote sellers,” but they were nonetheless losing between $8 billion and $13.4 billion a year in uncollected taxes for online sales. State officials put their revenue losses even higher.

In California, the state sales tax is 7.25% and counties and cities may add to that. Los Angeles County adds 2.25%.

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david.savage@latimes.com

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UPDATES:

3:25 p.m.: The article was updated with reaction from businesses and government officials.

8:30 a.m.: The article was updated with details of the ruling and comments from South Dakota state Sen. Deb Peters and National Retail Federation President Matthew Shay.

The article was originally published at 7:35 a.m.