Published: Thu, June 21, 2018
Industry | By Johnnie Johnson

Supreme Court closes online sales tax loophole

Supreme Court closes online sales tax loophole

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

In a 5-4 ruling on Thursday, the Supreme Court decided that states could tax internet sales, even when the internet retailer was not based in that state.

The high court ruled Thursday to overturn those decisions.

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"The Internet's prevalence and power have changed the dynamics of the national economy", wrote Justice Anthony Kennedy in the majority opinion. All three companies sold online merchandise in the state, but did not have a physical location or employees there, and were exempted from collecting sales tax from their South Dakota customers. North Dakota that prohibited states from requiring retailers to collect sales taxes if the seller didn't have a physical presence in the state, such as a distribution or call center. Customers in most cases are supposed to pay the tax themselves, but both sides of the debate admit few actually do.

A coalition of small business owners, many offering their online goods from home offices, say their profits would evaporate if forced to comply with complex tax rules in all 50 states. It also provides sellers access to sales tax administration software paid for by the State.

Amazon has been collecting sales taxes in all states that have the tax since April 2017 and in many states - including Texas - much earlier. Chief Justice John Roberts dissented along with Stephen Breyer, Sonia Sotomayor, and Elena Kagan.

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That said, South Dakota's tax system includes several features that appear created to prevent discrimination against or undue burdens upon interstate commerce. That will open the door to more states passing laws similar to South Dakota's.

"There was a time when we wanted the United States, as a matter of policy, to protect nascent internet businesses by keeping down the tax burden, but that time is long gone", he said. Sellers who use eBay and Etsy, which provide platforms for smaller sellers, also aren't required to collect sales tax nationwide.

South Dakota specifically brought this lawsuit against Wayfair, Overstock.com, and Newegg.

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