Brace yourself. Prices are about to go up for many online transactions after today’s Supreme Court ruling that states can tax internet businesses even if the retailer does not have a physical presence in the state.
The 5-4 ruling came in the case of South Dakota v. Wayfair, which challenged South Dakota’s application of its sales tax law to retailers without a physical location or employees in the state. The ruling overturned a 1992 ruling in Quill Corp. v. North Dakota which held that it was unconstitutional for states to tax companies that had no physical presence in the state.
“Quill Court did not have before it the present realities of the interstate marketplace, where the Internet’s prevalence and power have changed the dynamics of the national economy,” Kennedy wrote in the decision. “The expansion of e-commerce has also increased the revenue shortfall faced by States seeking to collect their sales and use taxes, leading the South Dakota Legislature to declare an emergency.”
The Court did not issue states a carte blanche for internet taxation. Kennedy noted that the South Dakota law excluded companies that only did limited business in the state and had a single, state-level tax. It also provided software for retailers that granted immunity from audits. The South Dakota law was not applied retroactively.
The decision was authored by Justice Anthony Kennedy and the other justices seemed to unanimously agree that the Quill ruling was wrong, but disagreed on whether the Court or Congress should fix the problem. The ideologically-mixed group that joined Kennedy’s decision included Clarence Thomas, Samuel Alito, Ruth Bader Ginsburg, and Neil Gorsuch. Chief Justice John Roberts, Stephen Breyer, Sonia Sotomayor, and Elena Kagan dissented, arguing that the Court’s Quill ruling was wrong, but that Congress should pass a law to change the taxing authority for the states.
Brick-and-mortar retailers sided with South Dakota, arguing that the tax-free status of internet sales created an unfair advantage for companies. The Trump Administration and 35 states also backed South Dakota’s tax law.
“In light of Internet retailers’ pervasive and continuous virtual presence in the states where their websites are accessible, the states have ample authority to require those retailers to collect state sales taxes owed by their customers,” Solicitor General Noel Francisco wrote in a court brief submitted by the government.
The stocks of internet retailers fell on news of the ruling. Wayfair, the company named in the case, was down more than six percent as of this writing. Amazon, one of the nation’s largest companies, was down 1.3 percent.
Amazon was singled out by President Trump earlier this year for escaping tax liability. The company, which has a physical presence in many states, was not directly involved in the ruling and will be minimally affected since it already collects sales taxes on its direct sales. Third-party retailers hosted by Amazon’s site are responsible for collecting their own sales taxes and not all do.
The internet tax battle will now move to the states where legislatures will decide their own tax policy. Only five states (New Hampshire, Oregon, Montana, Alaska and Delaware) do not have a statewide sales tax, but not all currently collect taxes on internet sales. With today’s ruling, that number is certain to increase and taxes will be going up.