TAXATION: Supreme Court Changes the Face of Online Commerce

In a landmark ruling on Thursday, the Supreme Court decided 5-4 that states now have the ability to collect sales tax on online purchases originating locally…even if the businesses themselves do not have a physical location in the state. The decision, which came in the case of South Dakota vs. Wayfair, has the potential of changing the face of e-commerce forever as many smaller online retailers are afraid their profits will evaporate under the new regulations.

States have argued for a long time that they were losing out on massive amounts of sales tax potential because customers were flocking to the duty-free haven of the internet. The states were accompanied by a chorus of complaints from brick-and-mortar retailers who see the internet as providing an unfair zone of competition due to the lack of sales tax on so many purchases.

Nonetheless, the court found that states have the authority to collect taxes on sales transactions that take place under their jurisdiction, a decision that does, if nothing else, return more power to state governments than has been afforded them in recent years.

“Stare decisis can no longer support the Court’s prohibition of a valid exercise of the States’ sovereign power,” the Supreme Court justices wrote in the official opinion. “If it becomes apparent that the Court’s Commerce Clause decisions prohibit the States from exercising their lawful sovereign powers, the Court should be vigilant in correcting the error.”

“The physical presence rule has long been criticized as giving out-of-state sellers an advantage,” the Court wrote. “Each year, it becomes further re- moved from economic reality and results in significant revenue losses to the States. These critiques underscore that the rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause.”

It will be interesting to see what effect, if any, this has on the economic consumer boom we’ve been seeing lately, no small part of which has been driven by online sales. Not that such considerations should play a role in a decision of law, but it will have an impact on the market – no question about that. The only question will be if that impact is enough to discourage states from actually following through on this taxation or even large enough to inspire Congress to take action legislatively. Certainly, heavy hitters like Amazon are going to complain…loudly.

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