Supreme Court Clears Way for Sales Taxes on Internet Merchants

Internet retailers can be required to collect sales taxes in states where they have no physical presence, the Supreme Court ruled in a 5-4 decision. Brick-and-mortar businesses have long complained that they are disadvantaged by having to charge sales taxes while many of their online competitors do not. States have said that they are missing out on tens of billions of dollars in annual revenue under a 1992 Supreme Court ruling that helped spur the rise of internet shopping. On June 21, the court overruled that ruling, Quill Corporation v. North Dakota, which had said that the Constitution bars states from requiring businesses to collect sales taxes unless they have a substantial connection to the state. 

Writing for the majority in the 5-to-4 ruling, Justice Anthony Kennedy said the Quill decision had distorted the nation’s economy and had caused states to lose annual tax revenues between $8 billion and $33 billion. “Quill puts both local businesses and many interstate businesses with physical presence at a competitive disadvantage relative to remote sellers,” he wrote. “Remote sellers can avoid the regulatory burdens of tax collection and can offer de facto lower prices caused by the widespread failure of consumers to pay the tax on their own.”  In dissent, Chief Justice John Roberts agreed that the court’s rulings in this area had been “wrongly decided.” But he said there were insufficient reasons to overrule the precedents and that Congress should have been left to address the matter. “E-commerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical-presence rule,” the chief justice wrote. “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.”

State legislators and big-box stores had been unsuccessful for years in pushing Congress to give states the authority to require sales-tax collection. The US Senate passed a bill in 2013, but it died in the House, caught in a fight between anti-tax Republicans and Republicans who back the brick-and-mortar retailers. The June 21 opinion is likely to spur a new push for a federal law to limit states’ ability to require tax collection by small businesses and to restrain cross-border audits. This time, however, it will be Internet retailers and catalog businesses seeking guardrails on state action, and they’ll have the burden of mustering majorities in a Congress.