In a close decision, the Supreme Court on Thursday determined that states can force internet retailers to collect sales taxes from shoppers even in states where they have no physical presence, handing traditional retailers and state governments a major victory.
For years, brick-and-mortar chains have complained of an uneven battlefield in the e-commerce wars, saying they had to charge and collect sales taxes everywhere while e-commerce rivals did not, except in states where they had a physical presence such as a distribution center or a store. The issue has also been an irritant to state governments, deprived of billions of dollars a year at a time many are struggling to balance budgets.
The retail industry hailed the decision. “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,” National Retail Federation CEO Matt Shay said in a statement.
Shares in online retailers like Amazon.com (AMZN), Wayfair (W), Etsy, (ETSY) Overstock.com (OSTK) and eBay (EBAY) all fell in the wake of the decision.
The Supreme Court’s 5-4 decision overruled a 1992 ruling that found the Constitution didn’t allow states to require businesses to collect sales taxes unless they have a substantial connection to the state. But in recent years, several Supreme Court justices suggested the moment was ripe to review the 1992 decision, prompting South Dakota to pass a law forcing online stores to collect a 4.5% sales tax if sales and employee count hit a certain threshold. And it sued Wayfair, Overstock.com and Newegg, which won in lower court decisions.
“Rejecting the physical presence rule is necessary to ensure that artificial competitive advantages are not created by this court’s precedents,” Justice Anthony Kennedy wrote in the court’s decision in the case, South Dakota v. Wayfair. The Court also found that “the expansion of e-commerce has also increased the revenue shortfall faced by States seeking to collect their sales and use taxes.” One federal report estimated the shortfall in the aggregate to about $13 billion a year.
By and large, traditional retailers have adjusted to the rise of Amazon and many, such as Macy’s (M), Kohl’s (KSS), and Nordstrom (JWN) get 20% of revenues online. The likes of Walmart (WMT) and Target (TGT) have invested heavily in e-commerce and now garner billions of dollars in sales online. But for a number of years, during which Amazon built up its mammoth lead, the different tax requirements gave online retailers an edge.
Amazon, a frequent target of President Trump’s over sales tax collection, was not involved in the Supreme Court case. It collects sales taxes on purchases made on its site from its own inventory, but does not do so on behalf of third-party sellers selling products on its marketplaces platform. In recent years, Amazon has built distribution centers in many states and last year bought Whole Foods, giving it a physical presence in many states anyway.