Supreme Court Rules in Favor of States in Online Sales Tax Case

Internet retailers can be required to collect sales taxes in states where they have no physical presence, the Supreme Court ruled on Thursday. Brick-and-mortar businesses have long complained that they're disadvantaged by having to charge sales taxes while many of their online competitors do not. States have said that they're missing out on tens of billions of dollars in annual revenue under a 1992 Supreme Court ruling that helped spur the rise of online shopping. On Thursday, the court overruled that ruling, Quill Corporation v. North Dakota, which had said that the Constitution bars states from requiring businesses to collect sales taxes unless they have a substantial connection to the state. The vote was 5 to 4.

Total Retail's Take: Big news to come out of Washington this morning that figures to have far-reaching implications on the retail industry. On the one side of the aisle are traditional brick-and-mortar retailers, which are celebrating the Supreme Court's ruling. Here's some reaction from the National Retail Federation (NRF) and the Retail Industry Leaders Association (RILA), two of the retail industry's largest trade associations:

“Retailers have been waiting for this day for more than two decades," said Matthew Shay, president and CEO of the NRF. "The retail industry is changing, and the Supreme Court has acted correctly in recognizing that it’s time for outdated sales tax policies to change as well.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.” 

“Today’s decision culminates years of tireless work by the retail community 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 RILA and president of the Retail Litigation Center. “This was the right case and the right time for the Court to act, and we couldn’t be more pleased with the outcome. For the consumer, this means an increasing array of options both in-store and online, with competition for their business based on price, service, selection and value—not special tax treatment."

On the other side of the aisle are online-only retailers and brands, which will now be required to collect sales taxes in states in which they may not have a physical presence (i.e., nexus). This group, particularly SMBs within it, has argued that the software and processing capability required to collect and remit sales taxes for 13,000 jurisdictions would have a significant negative impact on their businesses.

“Small catalog and online retailers with little or no presence beyond their headquarters will be hurt the most — some will be forced out of business,” said American Catalog Mailers Association (ACMA) President and Executive Director Hamilton Davison. “The dizzying array of differing state and local tax laws presents impossible complexity for both remote sellers, like catalog companies, and their customers."

As in most disputes, the best solution probably lies somewhere in the middle. But how to get there? Your guess is as good as mine.