In a 5-4 decision, the Supreme Court overturned a longstanding precedent on Thursday that had barred states from requiring online companies to collect and pay sales taxes, delivering a victory for cash-strapped states and brick-and-mortar retailers.
Online retailers have long enjoyed an advantage over brick-and-mortar stores because of a 1992 Supreme Court ruling in Quill v. North Dakota, which forbade states from interfering with interstate commerce by taxing companies that don’t have a physical presence within their boundaries.
In the new case, South Dakota v. Wayfair, South Dakota had attempted to overturn that precedent, arguing that Quill was decided before the existence of internet commerce. (It dealt primarily with catalog sales.) The state, which argued it lost $50 million a year in sales tax, was supported by independent retailers such as bookstores that are forced to compete with online companies but whose products end up being more expensive because they must charge sales taxes. Even President Donald Trump has railed against the unfairness of online companies’ sales tax exemption.
Congress has wrestled with the issue for years, but fierce lobbying by online retail giants has prevented a legislative fix. A bipartisan group of senators filed a brief in the case supporting South Dakota’s effort to overturn the online sales tax ban, essentially acknowledging that the legislative body was too dysfunctional to fix the problem.
Supreme Court Justice Anthony Kennedy had seemed sympathetic to the states’ plight, and he essentially invited the South Dakota case in 2015 in Direct Marketing Association v. Brohl. That case involved Colorado’s attempt to collect taxes from online retailers indirectly by making them report sales to the state. Online retailers sued over the scheme, and the Supreme Court allowed the case to proceed. But in a concurrence, Kennedy acknowledged the “startling revenue shortfall” suffered by the states because of the court’s Quill decision and invited them to try to find a better case in which to present the issue to the high court. South Dakota took him up on the suggestion.
I'm going to say that Kennedy is right here, and that internet retailers were getting away with not collecting sales taxes for decades, and that means we're going to see a lot of state battles over this, but I'm not sure that things are going to change too much.
Of course, this could be the kick in the pants that Congress needs to actually put together legislation on this, and I'm sure both sides of the argument are going to be spending a lot of money lobbying Congress to take their side.
But frankly, not every state is going to want to suddenly force new state taxes on people who buy things online, which is going to be more affluent folks, who tend to vote more. Kennedy may have made the correct call here, but companies were already collecting sales taxes just to get state lawmakers off their backs, especially the big online retailers like Amazon.
On the other hand, there certainly are states that are going to want to make this happen as quickly as possible, so we'll see. Besides, more money collected for state services is a good thing, not collecting taxes was basically a tax cut for the rich.