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04 March 2024

Top US court gives states broad rights for online sales tax

Photo: AFP


The Supreme Court ruled Thursday that US states have broad rights to tax online sales of goods and services, reversing its own decision made 25 years earlier at the start of the internet era.

The nine justices were split, ruling 5-4 to overturn a prior decision by the top US court that had held that a state can only tax sales by businesses that have a physical presence in that state.

Thursday's ruling could have a major impact on both the online and brick-and-mortar retail sector - and give states the ability to shore up public coffers with sales tax revenues from e-commerce.

The decision, in which South Dakota prevailed over the online furniture retailer Wayfair, sent ripples through the internet shopping industry, sending shares tumbling in Amazon, eBay, Etsy and others.

South Dakota's case was supported by 35 states and the federal government, and saw the Supreme Court undo a 1992 ruling in which it held that the mail-order company Quill did not have to collect sales taxes in North Dakota.

The court held Thursday that its prior "physical presence rule" was "unsound and incorrect," and so prior decisions from 1967 and 1992 were both reversed.

Justice Anthony Kennedy, writing for the majority, said the earlier interpretation of the "commerce clause," a constitutional guarantee against interference with interstate commerce, was not applicable in this case.

"The (Supreme) Court has consistently explained that the Commerce Clause was designed to prevent states from engaging in economic discrimination so they would not divide into isolated, separable units," Kennedy wrote.

"And it is certainly not the purpose of the Commerce Clause to permit the judiciary to create market distortions."

States and traditional retailers had argued that the previous ruling gave an unfair advantage to online sellers who could ship across state lines without collecting taxes in various jurisdictions.

Shopping centers, department stores and major retail outlets have laid off thousands of workers and are struggling to remain open as consumers turn to internet home delivery for an ever-increasing array of goods and services.

Change of heart

In a concurring opinion, Justice Clarence Thomas said that after ruling on the opposite side in 1992, he had changed his mind.

A "quarter century of experience has convinced me" the Supreme Court's earlier decision was no longer justified, he wrote, adding that it was "never too late" to arrive at a better position.

Chief Justice John Roberts said in a dissenting opinion that the court should steer clear of efforts to manage the economy.

Roberts, joined by three other justices, wrote that electronic commerce "has grown into a significant and vibrant part of our national economy against the backdrop of established rules," and that Congress should address this question.

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.

President Donald Trump welcomed the ruling as he met with governors at the White House, many of whom had been pressing for the decision.

"It's a big, big victory for the governors in this room," Trump said.

'Level' playing field

National Retail Federation president Matthew Shay said the court "acted correctly in recognizing that it's time for outdated sales tax policies to change" and that the ruling "clears the way for a fair and level playing field where all retailers compete under the same sales tax rules."

But Citizens Against Government Waste president Tom Schatz said that as a result, "states and local governments now have the ability to force companies to take on the burdensome task of acting as tax collectors for more than 10,000 separate tax jurisdictions."

RJ Lehman of the libertarian R Street Institute expressed concern the ruling "could create great uncertainty and throw open the floodgates for states to test the limits of their new powers with a profusion of taxes on out-of-state people and businesses."

Amazon, which had long been a target of traditional retailers and local governments, reach agreements with most US tax jurisdictions to remit sales taxes on items it sells, although many third-party sellers on Amazon do not collect taxes.

Neil Saunders of the research firm GlobalData estimated the cost to consumers at some $15.2 billion a year and predicted the ruling would hurt small, internet-only sellers.

"The concern for retailers like Wayfair is that their prices will now effectively rise across many states. This weakens one of their competitive advantages," Saunders said.

"However, in our view, this outcome is fair."