Supreme Court Votes In Favor of New Online Sales Tax Legislation

By Brendan Menapace

The Supreme Court surprised the e-commerce world by ruling that states can require retailers to collect sales tax from online shoppers even in places where the business has no physical presence. This is a reversal of a previous Supreme Court decision set in 1992, which said that the Constitution doesn't allow states to require businesses to collect sales tax unless they have a certified connection to the states in question.

National Retail Federation CEO Matt Shay praised the court's 5-4 decision, telling Fortune, "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."

Shares for Amazon, Wayfair, Etsy and eBay all fell as a result of today's decision:

Amazon, Ebay, Wayfair, Etsy shares fall after Supreme Court rules that states can require internet retailers to collect sales tax https://t.co/5wBhJ2wsaQ pic.twitter.com/3qHi9hty7g

— CNBC Now (@CNBCnow) June 21, 2018

Justice Anthony Kennedy, who wrote the decision, said that the precedents requiring sales tax collection based on physical presence represents "a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a state's customers."

In 1992, e-commerce was not what it is now, though. According to a Statista study, 40 percent of U.S. digital buyers shopped online several times per month in April 2017. The e-commerce landscape has changed, so a rule change makes logistical sense.

The court also discussed a South Dakota law that currently exempts retailers with less than $100,000 in annual sales or 200 annual transactions in a state, according to USA Today. Justice Kennedy said Congress could set limits to give states the opportunity to collect sales tax from those smaller sellers, and that those exemptions could be a thing of the past.

"If some small businesses with only de minimus [too minor to merit consideration] contacts seek relief from collection systems thought to be a burden, those entities may still do so under other theories," Kennedy said. He added that the problems for those companies don't "justify retaining this artificial, anachronistic rule that deprives states of vast revenues from major businesses."

In his dissent, Justice John Roberts wrote that the decision could impact e-commerce's "significant and vibrant part of our national economy," and that he believes the Supreme Court is overcorrecting "a mistake it made over 50 years ago."

Former Office Depot CEO Steve Odland said that the decision could raise prices for consumers.

"I think what this does is it essentially levels the playing field," Odland said, according to ABC News. "There is a chance here that it raises prices for consumers by passing on this tax increase. In some cases, the sales tax numbers are 7 or 8 percent, and you would expect to see that passed through."

South Dakota Attorney General Marty Jackley called the excision "a win for South Dakota and for Main Street businesses across America."

If prices were to increase noticeably, it could have a dramatic impact on the way Americans shop online, or shop at all.

For the promotional products industry, the change could have noticeable effects for companies that sell online, especially smaller businesses with limited resources and accounting staff. Here's what we wrote in April in our initial coverage of the online sales tax proceedings:

Given how tax regulations differ from state to state, it could lead to massive accounting headaches, and would require increased coordination between suppliers and distributors depending on their locations and the location of end-buyers. That along with potential shakeups in purchasing habits if orders suddenly get more expensive for buyers with sales tax factored in.

It will be up to individual states to decide if and how they will begin collecting online sales tax from out-of-state sellers, but some states appeared eager to take advantage of the new ruling. Illinois, for example, included in its $38.5 billion budget proposal a plan to collect a 6.25 percent use tax on online sellers outside the state, but was waiting for the Supreme Court ruling before proceeding, according to Chicago Daily Law Bulletin.