Politics
Supreme Court Clears Way For State Sales Taxes On Internet Commerce
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The U.S. Supreme Court cleared the way for states to collect sales taxes on internet commerce Thursday, overturning a 1992 decision that limited state tax collection to businesses with a physical presence in their jurisdiction.
Justice Anthony Kennedy delivered the Court’s opinion for a five-justice majority, which included Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito, and Neil Gorsuch.
“The physical presence rule has long been criticized as giving out-of-state sellers an advantage,” Kennedy wrote. “Each year, it becomes further removed from economic reality and results in significant revenue losses to the states.”
The case was occasioned in 2016 when South Dakota adopted a law requiring e-commerce merchants to remit sales tax payments to the state government. While many states have already imposed sales taxes on e-commerce, in most cases there is no mechanism for internet merchants to transmit those funds to state officials.
South Dakota estimates that it loses $50 million per year to lost sales tax revenue. One federal report suggested the states lose $13 billion in annual revenue, due to their inability to collect taxes from remote sellers.
41 states and the District of Columbia files amicus (or “friend-of-the-Court”) briefs supporting South Dakota’s position at the high court.
In his opinion for the Court, Kennedy explained that the physical presence requirement puts brick-and-mortar businesses at a disadvantage, since they have to comply with a tax regulatory burden their digital competitors escape. This state-driven economic discrimination, he said, violates the Constitution’s commerce clause.
He also noted that the Quill decision distorts the market, since it encourages internet sales behemoths like Amazon to avoid opening support centers or distribution hubs that would trigger the physical presence rule.
“Rejecting the physical presence rule is necessary to ensure that artificial competitive advantages are not created by this Court’s precedents,” he wrote.
Chief Justice John Roberts dissented, joined by Justices Stephen Breyer, Sonia Sotomayor, and Elena Kagan. Roberts argued Congress, not the Court, should reformulate the physical-presence requirement.
“E-commerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical-presence rule,” Roberts wrote. “Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress.”
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