You have most likely been able to avoid paying sales tax on a lot of online purchases over the years, but that’s coming to an end. In a 5-4 decision, the US Supreme Court has overturned decades-old rules that limited which transactions could be charged state sales taxes. This will be a huge boost to state budgets, but online retailers won’t be pleased.
Sales tax collection previously followed that is commonly known as the physical presence rule. If a business had a physical presence in a state, then they could be forced to collect sales tax at the time of purchase. Writing for the majority, Justice Anthony Kennedy wrote that the old rule is increasingly “removed from economic reality and results in significant revenue losses to the States.”
The suit (South Dakota v. Wayfair) was brought by 40 states that claim the old rule had cost them billions in lost tax revenue. While retailers were not required to collect sales tax, that tax was technically still owed. It was your responsibility to pay sales tax on your untaxed online purchases at the end of the year, but virtually no one did that. States had no viable way to track down everyone who wasn’t paying their sales tax, which is why they wanted to force retailers to collect it regardless of where they were located.
Brick-and-mortar retailers are also celebrating the news. Physical stores have always had to charge sales tax, but many online retailers have been able to undercut them by ignoring sales tax. For example, the popular electronics seller BH only charges sales tax in New York and New Jersey, where it has a physical presence. Meanwhile, Amazon’s expansive operations meant it was already charging sales tax almost everywhere. This ruling could give it a boost as competing online stores are forced to raise prices at checkout.
Nothing will change immediately after this ruling. States can, however, begin passing laws that require online retailers to collect sales tax from customers even if they have no physical presence in a state. This will add a new layer of complexity for small businesses that were previously selling without sales tax, but the specific rules will vary by state. The law that sparked this challenge passed in South Dakota in 2016. It required out of state retailers with more than $100,000 in SD sales to collect sales tax.
The court’s conservative wing argued that the previous ruling was sufficient to protect the rights of states, but the Trump administration urged the court to side with South Dakota and expand tax collection powers.