Supreme Court takes up internet sales tax case

Packages from Internet retailers are delivered on Friday

Packages from Internet retailers are delivered on Friday to an apartment building in Washington

South Dakota, Florida, Nevada, Texas, Washington and Tennessee are the six states with the most at stake as the Supreme Court hears oral arguments on Tuesday in South Dakota v. Wayfair, Inc., the case involving e-commerce sales taxes. E-commerce sites aren't obligated to collect sales taxes in states where they don't have a physical presence, such as a warehouse or brick-and-mortar shop, so while Amazon pays up for goods it sells from its own inventory in all 45 states that require them, on its third-party marketplace, which accounted for $32 billion in sales past year, merchants often don't. Wayfair, which will go before the Supreme Court justices on Tuesday, calls into question a 1992 court ruling that outlines how states and other localities can tax goods sold outside of their borders.

Amazon, which is not involved in the Supreme Court case, collects sales taxes on direct purchases on its site but does not collect taxes for items sold on its platform by third-party venders, constituting around half of total sales.

That practice stems from a 1992 Supreme Court decision.

The justices will decide whether to overturn 50 years' worth of rulings that forbid states from imposing sales taxes on whatever their residents buy from out-of-state retailers.

Software does exist that would allow online retailers to easily automate the state and local sales tax collections process.

"This court's outdated physical-presence rule now causes outsized harms to state treasuries and fundamental unfairness among retailers", South Dakota argued in court papers.

Additionally, independent businesses on websites like Etsy and Ebay would be included in a rewritten sales tax law, as well as third party merchants that operate in Amazon's global marketplace, which totaled almost two-thirds of the company's gross merchandise volume at $313.4 billion.

Initially meant to regulate catalog-based sellers, the ruling has been challenged again and again by states seeking to claim their fair shake of online sales. The state is urging the court to let sales taxes be imposed on companies with an "economic presence" in a state - a test South Dakota says its law would pass.

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"That rule doesn't make sense anymore in today's world of e-commerce", said Deborah White, general counsel of the Retail Litigation Center, which represents the country's largest merchants.

The companies also note that the largest internet retailer, Amazon.com, now pays sales taxes in all the 45 states that collect them.

But South Dakota concluded in 2016 that the explosion in online sales changed the market drastically. That leaves out only Alaska, Delaware, Montana, New Hampshire and Oregon.

Although Alaska does not have a state sales tax, there are 107 jurisdictions in the state that levy sales taxes, including the city of Juneau.

"I think you're going to see a flood not only of demands for ongoing tax collection but retroactive audits", said Andy Pincus, a Washington lawyer who filed a brief on behalf of EBay and a group of small businesses that oppose the states. In addition, they said, the court can write a ruling that "applies prospectively only for all retailers and taxpayers".

A decision on the case by the U.S. Supreme Court is expected to be announced in June.

States generally require consumers who weren't charged sales tax on a purchase to pay it themselves, often through self-reporting on their income tax returns.

But Congress also could have acted any time since 1992. "The "physical presence" rule of those eras was enunciated by the Court long before virtual presence was even imaginable", added White.

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