Supreme Court closes online sales tax loophole

Saul Franklin
June 21, 2018

The justices voted 5-4 to overturn a 1992 ruling that said a company needed a "physical presence" in a state in order to be forced to collect sales tax at the time of purchase.

That's resulted in states losing millions of dollars in sales taxes every year and online retailers gaining a decades-long tax advantage against their brick-and-mortar peers.

The Supreme Court said the physical presence rule was "unsound and incorrect".

The decision ends years of work by the retail industry "to reverse a pre-internet era rule that distorts free markets and puts local brick and mortar stores at a competitive disadvantage with their online-only counterparts", said Deborah White, general counsel for the Retail Industry Leaders Association.

Customers were generally supposed to pay the tax to the state themselves if they don't get charged it, but the vast majority didn't.

The case, which we first told you about in April, was over a South Dakota law which requires retailers, regardless of where they are, to collect and pay sales tax.

In the wake of the ruling, companies like Amazon will have to keep an eye on how each state handles sales tax legislation and whether they will have to collect the funds on behalf of third-party sellers.

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Chief Justice John Roberts Jr., who wrote the dissenting opinion, argued that the Supreme Court left this question to Congress in 1992, and Congress has not acted.

Three identical bills were filed during the special session to match Louisiana's law with South Dakota's in case the U.S. Supreme Court allows...

Amazon has always been the "poster child" for this problem/opportunity as they have been the dominant online-only retailer for some time.

But sellers that only have a physical presence in a single state or a few states could avoid charging customers sales tax when they're shipping to addresses outside those states.

Stock prices for major online retailers fell after the decision was announced.

Only five states do not have a state-wide sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. States were missing out on around 25 percent of the tax from online sales, according to the Government Accountability Office, meaning $13 billion in missed sales.

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