The U.S. Supreme Court today ruled that e-commerce retailers should pay the same local sales taxes as brick-and-mortar businesses, which some see as a victory for communities decimated because of online shopping and others see as detrimental to interstate commerce.
States will be able to force more shoppers to pay sales tax when they make online purchases under a Supreme Court decision Thursday. It is considered a potentially big win for states.
Consumers can soon expect to see sales tax being charged on more online purchases, legal professionals say. The ruling involves the case of South Dakota v. Wayfair.
The Supreme Court’s 5-4 decision overrules two, decades-old Supreme Court decisions that states said cost them billions of dollars in lost revenue annually. The decisions made it more difficult for states to collect sales tax on certain online purchases, and more than 40 states had asked the high court to overrule them.
The cases the court overturned said that if a business was shipping a customer’s purchase to a state where the business didn’t have a physical presence such as a warehouse or office, the business didn’t have to collect the state’s sales tax. Customers were generally responsible for paying the sales tax to the state themselves if they weren’t charged it, but most didn’t realize they owed it and few paid.
Justice Anthony Kennedy wrote that the previous decisions were flawed.
“Each year the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the States,” he wrote in an opinion joined by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito and Neil Gorsuch. Kennedy wrote that the rule “limited States’ ability to seek long-term prosperity and has prevented market participants from competing on an even playing field.”
The ruling is also a win for large retailers, who argued the physical presence rule was unfair. Large retailers including Apple, Macy’s, Target and Walmart, which have brick-and-mortar stores, already generally collect sales tax from their customers who buy online. That’s because they typically have a physical store in whatever state the purchase is being shipped to. Amazon.com, with its network of warehouses, also collects sales tax in every state that charges it, though third-party sellers who use the site don’t have to.
Here are a variety of reactions from state and federal leaders in Illinois and other business interests.
U.S. Sen. Dick Durbin, D-Illinois
U.S. Senate Democratic Whip Dick Durbin, D-Ill., released the following statement after the U.S. Supreme Court ruled 5-4 to overturn a 1992 ruling that had given Internet-only retailers an unfair advantage over Main Street businesses by prohibiting states from requiring remote retailers to collect taxes already owed the same way local businesses do.
“This is good news for main street businesses in Illinois and across America. This ruling clears the way for our retailers to compete on a level playing field with internet giants. I’m honored to be part of the bipartisan coalition in Congress that has worked for years to make this change.
“I encourage our state and local leaders to focus the more than $380 million in projected new revenues that could be collected in Illinois on creating jobs in our state and reducing the current tax burden on working families.”
Durbin and Senators Mike Enzi, R-Wy., Heidi Heitkamp, D-N.D., and Lamar Alexander, R-Tenn., have repeatedly introduced The Marketplace Fairness Act to close this loophole in tax law.
American Legislative Exchange Council
The American Legislative Exchange Council is disappointed by today’s decision in favor of South Dakota in South Dakota v. Wayfair. The Supreme Court ruling empowers state governments to reach across their borders to tax and audit interstate online commerce. This is detrimental to small businesses and online retailers as the decision will stifle the economic growth of these businesses as well as discourage entrepreneurship. Congress remains the only avenue to protect small businesses and taxpayers, the Council said.
The ruling to kill Quill — the physical presence standard — subjects small businesses and entrepreneurs to taxing jurisdictions where they have no ability to vote to influence policymakers.
“Today’s Supreme Court decision will harm America’s innovators and small businesses. By permitting states to tax businesses outside of their borders, the Supreme Court’s decision will usher in a new, unheralded period in interstate commerce. Small businesses and innovators will be subject to over 12,000 taxing jurisdictions in the United States. They will face audits and compliance costs very few can comprehend. And many businesses will likely limit their reach or go out of business rather than face the risk of audit from states like California, Illinois, or New York. At this point, only Congress can save small businesses and innovators by passing legislation to protect them from over-aggressive state tax collectors,” said Jonathan Hauenschild, counsel of record for ALEC.
“With this ruling, onerous compliance costs related to remote sales taxation will threaten to stunt economic dynamism. Hardworking individual and business taxpayers deserve protection from out-of-state tax collectors and regulators. Congress is now the only way to safeguard innovators and entrepreneurs from aggressive regulation aimed at out-of-state taxpayers and out-of-state voters,” said Jonathan Williams, ALEC chief economist and vice president of the Center for State Fiscal Reform.
“Today’s ruling threatens to stunt economic growth. More concerning, it marks a departure from a constitutional understanding of federalism. Remote retailers-many of whom are small businesses-may soon be forced to keep track of the thousands of taxing jurisdictions across the country, many with their own rates, bases, rules and regulations. Congress remains the only solution to this threat,” said Joel Griffith, director of the Center for State Fiscal Reform.
State Sen. Andy Manar
Today’s U.S. Supreme Court ruling that e-commerce retailers should pay the same local sales taxes as brick-and-mortar businesses is a victory for downstate Illinois communities that have seen their local economies decimated because of online shopping, state Sen. Andy Manar , D-Bunker Hill, said.
“Out-of-state corporations have been gaming the system for a long time, with alarming consequences for cities like Springfield, Decatur and small towns all over the district I represent. We’ve watched storefront after storefront close and retail workers sent to the unemployment line,” said Manar, a Bunker Hill Democrat who has met with local small business owners and listened to their concerns about this issue.
“While online shopping is a wonderful convenience for rural consumers and businesses, it can also be a pox for many of the retailers we rely on to support our towns,” he added. “I’m talking about the moms and the pops who struggle to compete with faceless corporate giants that always manage to undercut them online because they get to play by a different set of rules.”
Illinois is poised to benefit right away from today’s Supreme Court ruling. Manar helped advance bipartisan legislation that requires out-of-state e-commerce retailers that do business with Illinois customers to collect a use tax under two conditions: their cumulative gross receipts exceed $100,000 or they have more than 200 separate transactions with customers in Illinois.
The measure creates a level playing field for retailers and will bring more economic stability to communities that have been hard hit by business closures the past few years. Those effects aren’t limited to job losses. Declining local sales tax revenue means less money for road and sewer repairs, sidewalk improvements, fire and police protection, and other local needs.
Lawmakers incorporated the Senate measure into the budget bill that was signed into law June 4 in anticipation of the Supreme Court decision. Now, out-of-state retailers are going to have to get used to the idea that they must pay their fair share, Manar said.
“The times change. Consumer habits change. I get that,” he said. “But if we don’t correct this imbalance, I fear some of our rural communities will be ghost towns in a few years.”
The National Retail Federation
he National Retail Federation issued the following statement from President and CEO Matthew Shay in response to a U.S. Supreme Court ruling in South Dakota v. Wayfair allowing states to require online sellers to collect sales tax the same as local stores.
“Retailers have been waiting for this day for more than two decades. The retail industry is changing, and the Supreme Court has acted correctly in recognizing that it’s time for outdated sales tax policies to change as well. This ruling clears the way for a fair and level playing field where all retailers compete under the same sales tax rules whether they sell merchandise online, in-store or both.
“While today’s decision is a major victory, there’s still work to be done. Congress must now follow the court’s lead and pass legislation implementing uniform national rules that provide consistency and clarity for retailers across the country.”
The court this morning upheld a 2016 South Dakota law that requires online merchants with more than $100,000 in annual sales to state residents or 200 transactions with state residents to collect sales tax.
NRF argued in a friend-of-the-court brief last year that the court’s 1992 Quill Corp. v. North Dakota decision was outdated and that sales tax collection is no longer the burden it might once have been due to changes in technology. In the brief, NRF cited a wide variety of software available to automatically collect the sales tax owed, much of its available free or at low cost.
NRF and other retail groups said in a second brief filed this year that lack of uniform collection is “inflicting extreme harm and unfairness” on local retailers by “distorting the retail market in favor of absentee ecommerce.”
Even with the favorable ruling, NRF believes federal legislation is still necessary to spell out details on how sales tax collection will take place rather than leaving it to each of the states to interpret the court’s decision. NRF has been a leading voice for equal sales tax rules for years, saying that Quill gave online sellers an unfair price advantage over local merchants.