Shoppers could now pay sales tax when they make online purchases under a Supreme Court decision Thursday. The fact that many states could not charge sales tax on online purchases has long stuck in the craw of local goverments seeking a way to confront a falling tax base in local communities.
Consumers can expect to see sales tax charged on more online purchases — likely over the next year and potentially before the Christmas shopping season — as states and retailers react to the court’s decision, said one attorney involved in the case.
The Supreme Court’s 5-4 decision Thursday overruled a pair of decades-old decisions that states said cost them billions of dollars in lost revenue annually. The decisions made it more difficult for states to collect sales tax on certain online purchases, and more than 40 states had asked the high court for action. Five states don’t charge sales tax.
The cases the court overturned said that if a business was shipping a customer’s purchase to a state where the business didn’t have a physical presence such as a warehouse or office, the business didn’t have to collect sales tax for the state. Customers were generally responsible for paying the sales tax to the state themselves if they weren’t charged it, but most didn’t realize they owed it and few paid.
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,” he wrote in an opinion joined by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito and Neil Gorsuch. Kennedy wrote that the rule “limited States’ ability to seek long-term prosperity and has prevented market participants from competing on an even playing field.”
The ruling is a victory for big chains with a presence in many states, since they usually collect sales tax on online purchases already. It was also seen as a victory by small mom-and-pop stores because they do not get the U.S. Postal subsidy and must themselves pay local tax. That often mean that prices on Amazon and other online retailers were cheaper than local stores, forcing many brick and mortar stores to close. The ruling levels the playing field, for taxes anyway, between traditional stores and the giants like Amazon.
The inability of states to charge sales tax meant many online retailers were getting a free ride–so to speak–when they delivered the goods. They were seen as using the roads, police, and other city, county and state services, but not contributing to the sales tax base as do purchases at the check-out counter.
Big chains have been collecting sales tax nationwide because they typically have physical stores in whatever state a 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 don’t have to.
Until now, many sellers that have a physical presence in only a single state or a few states have been able to avoid charging sales taxes when they ship to addresses outside those states. Online sellers that haven’t been charging 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 that use eBay and Etsy, which provide platforms for smaller sellers, also haven’t been collecting sales tax nationwide.
Under the ruling Thursday, states can pass laws requiring out-of-state sellers to collect the state’s sales tax from customers and send it to the state.
Some experts believe, while increasing the cost of some items, it will eventually contribute to the saving of millions of jobs in the retail sector and the survival of many small downtown business districts across the nation.
–Wire services