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Supreme Court: States Can Collect Sales Taxes for Online Purchases

Some online stores promoted the lack of sales tax as a reason to buy from them

Close up of woman's hands with credit card online shopping

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As online retail sales soar, the Supreme Court's decision is a setback for retailers and cost-conscious consumers.

En español | The Supreme Court ruled Thursday that online retailers can be forced to collect sales taxes for states where their buyers live but the retailers do not maintain a physical presence, overturning a 1992 ruling that predated the rise of e-commerce.

The 5-4 ruling is a setback for online shopping, in general, and possibly cost-conscious consumers, too. Many of the largest online retailers—including Amazon, Apple, Target and Walmart—already are collecting these sales taxes. But many others do not, including the three defendants in the lawsuit (Newegg, Overstock and Wayfair).

In the majority opinion in South Dakota v. Wayfair, Justice Anthony Kennedy wrote that the precedent established by the previous case “is a judicially created tax shelter for businesses that limit their physical presence in a State but sell their goods and services to the State’s consumers, something that has become easier and more prevalent as technology has advanced.”

In dissent, Chief Justice John Roberts wrote that the “internet’s prevalence and power” in the national economy leads him to be more wary of overturning precedent so starkly. He suggested that Congress would be the proper body to make a fix.

In 2017, internet transactions accounted for more than 9 percent of all retail sales, according to the Census Bureau. Amazon on its own represented 4 percent of all sales.

“The retail industry is changing, and the Supreme Court has acted correctly in recognizing that it’s time for outdated sales tax policies to change as well,” said Matthew Shay, president and CEO of the National Retail Federation, which filed briefs in favor of making online retailers collect sales taxes. “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.”

With the ruling, states could see a boon in revenue coming their way, with estimates of as much as $1 billion or more for large states like California and New York. South Dakota, the plaintiff in the Supreme Court case and the fifth-smallest state in the country by population, calculates its lost sales tax revenue at $50 million a year. The state has no income tax and thus relies more heavily on its 4.5 percent sales tax for revenue.