WASHINGTON (CN) – Reversing decades of precedent, the Supreme Court on Thursday held states may force online retailers to collect and remit sales tax on transactions even if they do not have a traditional storefront in the state.
The 5-4 ruling reverses the high court’s holdings in the 1967 case National Bellas Hess v. Department of Revenue of Illinois, and the 1992 case Quill Corporation v. North Dakota.
Writing for the majority, Justice Anthony Kennedy said the rule that retailers must have a physical presence in a state in order for a state to compel them to collect and remit sales tax “is an incorrect interpretation of the commerce clause.”
He also called the regime “an extraordinary imposition” by the court on the rights of the states to collect taxes.
“Quill’s physical presence rule intrudes on states’ reasonable choices in enacting their tax systems,” Kennedy wrote. “And that it allows remote sellers to escape an obligation to remit a lawful state tax is unfair and unjust. It is unfair and unjust to those competitors, both local and out of state, who must remit the tax; to the consumers who pay the tax; and to the states that seek fair enforcement of the sales tax, a tax many states for many years have considered an indispensable source for raising revenue.”
In National Bellas Hess, the Supreme Court held states could not require mail-order catalog companies to collect sales tax on every purchase if they did not have a physical presence in the state, later reaffirming that holding in Quill.
In the absence of out-of-state retailers collecting state sales tax on their own, which Amazon and other large online sellers now do, customers are supposed to pay the tax themselves. Because few consumers do this, states lose anywhere between $8 billion and $33 billion every year, according to a study cited in Kennedy’s opinion.
South Dakota was one such state, with the state estimating its inability to collect taxes from online retailers costs it between $48 million and $58 million per year in tax revenue. Seeking to bridge this shortfall, state lawmakers in 2016 passed a law allowing the state to collect sales tax from “certain remote sellers.”
The South Dakota law limits the requirement to out-of-state companies that bring in at least $100,000 or conduct at least 200 sales to customers in the state.
Though a lower court granted summary judgment to a group of large online retailers because the law conflicted with the Supreme Court’s precedent in the area, Kennedy on Thursday wrote that precedent is “flawed on its own terms” and “creates rather than resolves market distortions.”
Kennedy rejected claims from the retailers that attempting to comply with a tangle of sales tax regimes in different states would be crippling, saying concerns about compliance costs for large companies are overstated.
“In other words, under Quill, a small company with diverse physical presence might be equally or more burdened by compliance costs than a large remote seller,” Kennedy wrote. “The physical presence rule is a poor proxy for the compliance costs faced by companies that do business in multiple states.”
He also noted the rule in Quill puts businesses with traditional storefronts at a disadvantage with online retailers that can sell the same goods at lower prices by not collecting sales tax.
“In effect, Quill has come to serve as a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a state’s consumers – something that has become easier and more prevalent as technology has advanced,” Kennedy wrote.
He acknowledged that Congress could undo the physical presence rule if it wanted, but said it should not be left to Congress “to address a false constitutional premise of this court’s own creation.”
While he noted overturning Supreme Court precedent is a serious undertaking, the boom of the internet has fundamentally transformed the issue from the time the court last considered it in Quill.
Kennedy was joined in the majority by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito and Neil Gorsuch.
Writing for an unusual coalition of justices that includes three of the court’s most liberal members, Chief Justice John Roberts wrote that while he agrees with the majority’s decision to overturn National Bellas Hess, members of Congress, not Supreme Court justices, should be the ones to tinker with the rules for the vast online marketplace that has developed under the precedent.
“Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress,” Roberts wrote. “The court should not act on this important question of current economic policy, solely to expiate a mistake it made over 50 years ago.”
Roberts wrote the majority is seeking to reverse precedent with “an inexplicable sense of urgency,” noting some of the largest online retailers are already starting to collect sales tax voluntarily and that states are increasingly able to collect taxes on sales to out-of-state companies.
He also emphasized the burden on retailers attempting to comply with sales tax regimes across the country. Detailing a few oddities in local tax laws, such as New Jersey’s requirement that customers pay sales tax on yarn for “art projects” but not for sweaters, Roberts said the court’s decision could seriously harm small businesses that have been able to thrive online.
“People starting a business selling their embroidered pillowcases or carved decoys can offer their wares throughout the country – but probably not if they have to figure out the tax due on every sale,” Roberts wrote.
Justices Sonia Sotomayor, Elena Kagan and Stephen Breyer joined Roberts’ dissent.
South Dakota Attorney General Marty Jackley, who argued the case for the state at the Supreme Court, praised the decision on Thursday.
“Today’s landmark decision is a win for South Dakota and for Main Street businesses across America that will now have a level playing field and tax fairness,” Jackley said in a statement.
In a statement on Thursday, online retailer Wayfair, one of the respondents in the case, said the decision likely will not have a significant impact on its business, as it already remits sales tax on roughly 80 percent of its sales. However, the company said the same cannot be said for smaller businesses.
“Wayfair has long supported a legislative solution that would establish a level playing field for brick-and-mortar and online retailers by permitting states to collect sales tax on online sales,” Wayfair said in a statement. “While we believe the court was not the ideal venue for creating this level playing field, we expect that today’s decision will bring clarity and certainty to this issue.”