Supreme Court to Rule on Online Sales Taxes

A mail room in an apartment building shows packages about to be delivered

On Tuesday, the Supreme Court of the United States will hear a case regarding the current status of online sales tax collection and whether the law as-is requires a more modern update. The court first adopted its physical presence rule on sales tax collection in a 1967 case dealing with a catalog retailer.

A ruling for the states would put new pressure on internet retailers and marketplaces that don't always collect taxes - including Inc., Wayfair Inc., Newegg Inc., EBay Inc., Etsy Inc. and thousands of smaller merchants. "Such a rule firmly establishes the boundaries of legitimate state authority to impose a duty to collect sales and use taxes and reduces litigation concerning those taxes".

25 years ago there may have been an "infant industry" argument for not taxing online sales at all but now this is mature and rapidly growing market segment and does not any longer deserve special treatment versus store retail. The justices are due to decide the case by the end of June. Tax rates and rules vary not only by state but also by city and county. "What the Supreme Court decides could really determine whether NY can engage in that kind of practice, charging sales tax even when there isn't a physical presence in NY state".

The next step is to acquire the services and technologies they need to track, calculate and collect appropriate sales taxes in any state.

And besides, the companies argue, while e-commerce is growing rapidly, it still accounts for only about 9 percent of all retail sales - a smaller share than catalog companies had when the Supreme Court exempted them from paying sales taxes in states where they had no physical presence.

South Dakota estimates that the states could pick up a combined $34 billion a year if the court allows them to tax internet sales. Sales tax collection is nearly certainly in their future, whether this year or next, and they should begin immediately working with the appropriate resources to identify the states already collecting sales and use taxes and whether they have any retroactive liability. He says state budgets and local brick-and-mortar stores take a hit when Internet retailers do not charge sales tax. The state has conceded in court, however, that it can only win by persuading the Supreme Court to do away with its current physical presence rule. Large retailers with big physical footprints already collect sales tax in most states. Should a change happen, they will be burdened by having to put systems in place to collect sales tax, Peterson said.

Justice John Paul Stevens wrote for the court that the physical-presence requirement, despite its "artificiality", provided a clear standard for applying the dormant commerce clause. "So they'll come to a store likes ours and order from us".