Retailers Applaud Supreme Court Decision Closing Ecommerce Tax Loophole

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Retailers Applaud Supreme Court Decision Closing Ecommerce Tax Loophole

06/21/2018
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The U.S. Supreme Court rules states can force online shoppers to pay sales tax.

WASHINGTON, D.C. — In a ruling handed down on June 21, the U.S. Supreme Court leveled the playing field when it comes to online shopping and taxes.

In a 5-4 decision, the Supreme Court said states can force online shoppers to pay sales tax. The ruling came in response to South Dakota v. Wayfair, which focused on a decades-old loophole that allowed online-only retailers to avoid collecting and remitting state sales tax. 

The case centered around a 2016 South Dakota law requiring online merchants with more than $100,000 in sales to state residents or 200 transactions with state residents to collect sales tax, as Convenience Store News previously reported.

The law was struck down last year by South Dakota's highest court, which cited the U.S. Supreme Court's 1992 Quill Corp. v. North Dakota decision. In that case, the justices said online sellers can only be required to collect sales tax in states where they have a physical presence such as a store, office or warehouse, the association explained.

"Each year the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the States. These critiques underscore that the physical presence rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause," wrote Justice Anthony Kennedy.

The latest Supreme Court ruling for the states, which can now collect tax revenue, and large retailers who have a physical presence across the country.

"Today's decision culminates years of tireless work by the retail community to reverse a pre-Internet era rule that distorts free markets and puts local brick and mortar stores at a competitive disadvantage with their online-only counterparts," said Deborah White, general counsel for the Retail Industry Leaders Association (RILA) and president of the Retail Litigation Center (RLC). 

"This was the right case and the right time for the court to act, and we couldn't be more pleased with the outcome," she added.

RILA and its sister organization, RLC, worked on a years-long strategy to support the case in South Dakota and build a amicus strategy at both the cert and merit stages of the case. 

She pointed out the court did not agree with the argument that tax collection requirements would place a burden on start-up companies and small online retailers.

"The court clearly didn’t buy the argument made by the Respondents in this case that remote sales tax compliance represented the same burden today that it did in 1992," White said. "Through its decision, the court has acknowledged that the same computing sophistication that has fueled exponential growth in e-commerce has also dramatically simplified remote sales tax collection."

Following the ruling, White expects the 45 states with a sales tax to work on legislative and regulatory solutions to close the online loophole in their states. "States had this authority taken from them decades ago," she said. "Most will work quickly and judiciously to reclaim their authority and create a level playing field for all retailers selling to customers in their states."

On the impact of the decision for the retail industry and its customers, White said the move would ultimately be a win for both. 

"Today's ruling will give every retailer the opportunity to compete on a level playing field without government's thumb on the scale — that's a win for all those who believe in free markets," she said. "For the consumer, this means an increasing array of options both in-store and online, with competition for their business based on price, service, selection and value — not special tax treatment."

The National Retail Federation (NRF) also applauded the Supreme Court's ruling.

"Retailers have been waiting for this day for more than two decades. The retail industry is changing, and the Supreme Court has acted correctly in recognizing that it's time for outdated sales tax policies to change as well," said NRF's President and CEO Matthew Shay. "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."

Shay added there's still work to be done. "Congress must now follow the court's lead and pass legislation implementing uniform national rules that provide consistency and clarity for retailers across the country," he added.

NRF argued in a friend-of-the-court brief last year that the court's 1992 Quill Corp. v. North Dakota decision was outdated and that sales tax collection is no longer the burden it might once have been due to changes in technology. In the brief, NRF cited a wide variety of software available to automatically collect the sales tax owed, much of its available free or at low cost. 

NRF and other retail groups said in a second brief filed this year that lack of uniform collection is "inflicting extreme harm and unfairness" on local retailers by "distorting the retail market in favor of absentee ecommerce."