Supreme Court clears way for states to collect sales tax from internet retailers
Illustration by Sara Wadford; Shutterstock
The U.S. Supreme Court on Thursday ruled that states may collect sales tax from internet retailers. Justice Anthony M. Kennedy wrote the majority opinion, joined by Justice Ruth Bader Ginsburg and the court's three most conservative justices. The case is South Dakota v. Wayfair.
The majority overruled a 1992 decision holding that the Constitution’s dormant commerce clause bars states from collecting sales taxes from retailers without a brick-and-mortar presence in the state. The previous decision was Quill Corp. v. North Dakota.
“The physical presence rule of Quill is unsound and incorrect,” Kennedy wrote. “Though Quill was wrong on its own terms when it was decided in 1992, since then the internet revolution has made its earlier error all the more egregious and harmful.”
In 1992 when Quill was decided, less than 2 percent of Americans had internet access, compared to about 89 percent today Kennedy wrote. When Quill was decided, “the court could not have envisioned a world in which the world’s largest retailer would be a remote seller,” namely, Amazon, Kennedy said.
In 1992, mail-order sales in the United States totaled $180 billion. Last year, e-commerce retail sales alone were an estimated $453.5 billion.
Kennedy also said the rule had created an unfair system favoring internet retailers. “In effect,” he wrote, “Quill has come to serve as a judicially created tax shelter for businesses that decide to limit their physical presence.” The decision was also having an impact on states’ bottom line, Kennedy said, citing estimates that states are losing $8 billion to $33 billion a year in sales tax revenue.
At issue in the case was the constitutionality of a South Dakota law that requires out-of-state retailers to pay sales taxes if they make at least 200 sales or at least $100,000 in sales. The law was not retroactive, Kennedy pointed out.
Chief Justice John G. Roberts Jr. dissented in an opinion joined by Justices Stephen G. Breyer, Sonia Sotomayor and Elena Kagan.
Roberts said he agreed that a 51-year-old case partly affirmed by Quill was wrongly decided, but he opposes discarding the physical presence rule because the internet economy has grown in reliance on it. Any change to rules with the potential to disrupt such a critical segment of the economy should be left to Congress, Roberts said.
Collecting taxes on all e-commerce sales “will likely prove baffling for many retailers,” Roberts said. More than 10,000 jurisdictions collect sales taxes, with differing rates and rules.
“This is neither the first, nor the second, but the third time this court has been asked whether a state may obligate sellers with no physical presence within its borders to collect tax on sales to residents,” Roberts wrote. “Whatever salience the adage ‘third time’s a charm’ has in daily life, it is a poor guide to Supreme Court decision-making.”
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ABA Journal: “The high court weighs whether internet retailers must collect state sales taxes”
