Supreme Court overrules 1992 sales tax decision

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The Supreme Court ruled Thursday that state governments to compel retailers beyond their borders to collect sales-tax revenue from consumers - a move which could rock online shopping.

The case, South Dakota v. Wayfair, overturned a 1992 Supreme Court decision that protected online vendors from sales tax obligations if the vendor did not have a physical brick and mortar store in the state.

Boston-based Wayfair says it has been collecting sales tax as it has opened warehouses across the country to ship its sofas, rugs and other products.

"Each year, the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the states", said Supreme Judge Anthony Kennedy and added that the criticism only emphasizes that the rule of physical presence is an erroneous interpretation of the Trade Law. For decades, these sales tax laws were only applicable on purchases that were made from retailers who had a physical presence within that state. But he said "Any increased revenue attributable to total enforcement of our sales tax laws must be steered toward property tax relief".


"It'll be depending on how the (Indiana) Department of Revenue implements rules and is ready to accept the remittance from out-of-state online retailers", the lawmaker said.

The 5-4 decision overruled a 1992 ruling in a case that originated in North Dakota. Attorney General Marty Jackley said it was a win for South Dakota and for "Main Street businesses across America that will now have a level playing field and tax fairness". Consultants like Mark Grinis, partner, global real estate at EY, said he did not expect a surge in demand for stores even if prices ticked up for online businesses.

"The decision does not articulate much of a floor for what states may do, so it is possible that another state could pass a law with lower thresholds than the South Dakota law", says Hayes Holderness, a law professor at the University of Richmond. Before that, retailers didn't have to collect state sales taxes if it was shipping items to someone in a state where the business didn't have a physical presence. Kennedy said that position was archaic, "unsound and incorrect" in the internet age.

This law affects IL shoppers that check out of shopping sites without paying sales tax, and the sites are now required to add them. Congress, as the court acknowledged, could enact a broad-based law for state sales tax collection.


But Nebraska won't be able to start collecting sales taxes from online retailers until next year at the earliest, after an Internet sales tax bill fell victim to a filibuster this year. Some states have exemptions for collecting sales tax.

In a statement by Rauschenberger, there will be criteria businesses have to meet before they are required to collect sales tax for the state.

Only five states do not have a state-wide sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. South Dakota has estimated it loses about $50 million annually to e-commerce.

But, she said, those customers don't always pay sales tax. The state also provides sales tax collection software for free for any business that wants it, and using that software immunizes the business from audit liability.


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