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High Court: Online shoppers can be forced to pay sales tax

Associated Press

WASHINGTON (AP) — The Supreme Court says states can force online shoppers to pay sales tax.

The 5-4 ruling, handed down on Thursday, comes as a victory for states, where officials said they were losing out on billions of dollars annually under two decades-old Supreme Court decisions that affected online sales-tax collections.

The high court chose on Thursday to overturn those decisions. The precedents they set had caused some companies to not collect sales tax on every online purchase. The cases the court overturned said that if a business was shipping a product to a state where it didn’t have a physical presence in the form of a warehouse or office, the business didn’t have to collect the state’s sales tax. Customers were generally supposed to pay the tax themselves if they weren’t charged it. But the vast majority didn’t.

Justice Anthony Kennedy wrote that the previous decisions were flawed.

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

In addition to being a victory for states, the ruling will also benefit large retailers, who argued the physical-presence rule was unfair. Retailers such as Apple, Macy’s, Target and Walmart, which have brick-and-mortar stores throughout the country, generally collect sales tax from their customers who buy online. That’s because they typically have a physical store in whatever states they might be shipping their goods to. Amazon.com, with its network of warehouses, also collects sales taxes in every state that charges them, although third-party sellers who use the site to sell goods don’t have to.

The trouble came with sellers that have a physical presence only in a single state or a few states. These sorts of retailers could avoid charging customers sales tax when they were shipping to addresses in other states.

Companies falling into this category include the jewelry website Blue Nile, the pet-products site Chewy.com and the clothing retailer L.L. Bean. Sellers who use eBay and Etsy, which provide online marketplaces for smaller sellers, also aren’t required to collect sales taxes.

Thursday’s ruling originated ultimately in a law passed by South Dakota in 2016. The South Dakota governor has said his state loses out on about $50 million a year worth of sales tax because of out-of-state sellers aren’t collecting it.

South Dakota, which has no income tax, relies heavily on sales taxes to pay for state government. State lawmakers passed a law meant as a direct challenge of a Supreme Court ruling dating to 1992. The South Dakota law required out-of-state sellers who do more than $100,000 of business in the state or more than 200 transactions annually with state residents to collect sales tax and turn it over.

South Dakota sued several out-of-state retailers: Overstock.com, the electronics retailer Newegg and the home-goods company Wayfair. The state conceded in court, however, that it could only win by persuading the Supreme Court to do away with its physical-presence rule.

The Trump administration had urged the justices to side with South Dakota.

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