The Supreme Court ruled on Thursday that states have the authority to make online retailers collect sales taxes, in a clear milestone which recognizes e-commerce as an important player on the market.
The 5-to-4 vote helped close a loophole which prevented states from requiring merchants to collect sales tax without the sellers’ “physical presence” within the state’s borders. The loophole had so far helped fuel a quick growth of internet sales, and the ruling will most likely put an end to the practice of avoiding taxes by buying goods online instead of from a local retailer.
Justice Anthony Kennedy, who suggested years ago that the pre-Amazon.com precedent should be updated for the digital age, said the “physical presence” rule had become unacceptable. Kennedy cited studies which indicate the rule costs states up to $33.9 billion annually in uncollected sales taxes, The Wall Street Journal writes.
He was supported by Liberal Justice Ruth Bader Ginsburg as well as conservative Justices Clarence Thomas, Samuel Alito and Neil Gorsuch.
Over 40 states, territories and the District of Columbia that rely on sales taxes had urged overruling the 1967 case that established the physical presence rule and a 1992 decision that affirmed it. They were backed by groups representing stores like Walmart and Target. Antitax groups and retail platforms including eBay Inc. and Etsy Inc. supported the defendants.
Even those who voted to keep the rule in place acknowledged that it was wrong. However, they argued that it should not be changed as so much of the economy has grown under its influence.
Some online retailers, such as Amazon.com Inc., already collect state sales tax on products they sell directly. It initially set up its business model to avoid state sales taxes, but later changed its strategy to build more warehouses closer to consumers and started charging sales tax on items it sells directly.
Nevertheless, Justice Kennedy stressed that states will be limited in their power to collect sales taxes, as small retailers will be exempt with the law.
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