In a case that could likely mean consumers paying more nationwide, the Supreme Court Thursday opened the door for states to collect sales taxes on purchases from online retailers even if that company doesn't have a physical presence in that state.
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The court overturned a longstanding rule that states can collect sales taxes only on transactions if the retailer has a "bricks and mortar" presence in that state. The decision could allow more states to impose sales taxes on companies that operate entirely online.
The internet retailers argued that allowing every state to collect taxes on online sales would cause confusion and unreasonable burdens in today's online-heavy retail economy.
But the court found it is "unworkable" to apply a rule based on physical offices to online sales, saying it caused more confusion as some states maintained that even allowing users to download an app in their state counted as a "physical presence."
"Statutes of this sort are likely to embroil courts in technical and arbitrary disputes about what counts as physical presence," Justice Anthony Kennedy said in the opinion.
Kennedy also said that the rule makes no sense, and that "this Court should not maintain a rule that ignores these substantial virtual connections to the State."
Business leaders said that the decision helps "brick and mortar" stores.
Justice Clarence Thomas, who originally supported the rule at issue, said he now thinks the it "can no longer be rationally certified" and supports the decision to overturn it.
Wayfair, the online furniture company named in the case, said in a statement the decision would not have a noticeable impact on their sales because they already collect sales tax on most transactions, but that it could impact retailers that don't already have that in place.
"Wayfair has long supported a legislative solution that would establish a level playing field for brick-and-mortar and online retailers by permitting states to collect sales tax on online sales. While we believe the Court was not the ideal venue for creating this level playing field, we expect that today’s decision will bring clarity and certainty to this issue," Wayfair spokeswoman Susan Frechette said in a statement.
Some retail leaders like former Office Depot CEO Steve Odland said the decision could raise prices for consumers by increasing sales taxes.
"I think what this does is it essentially levels the playing field," Odland said on CNBC. "There is a chance here that it raises prices for consumers by passing on this tax increase. In some cases, the sales tax numbers are 7 or 8 percent and you would expect to see that passed through."
The attorney general of South Dakota, who defended a state rule that required out-of-state retailers to collect state taxes, said the decision is a win for the state and small businesses.
“Today’s landmark decision is a win for South Dakota and for Main Street businesses across America that will now have a level playing field and tax fairness,” Attorney General Marty Jackley said in a statement.
One federal report released last year found that state and local governments lost out on $8 to $13 billion in tax revenue because they couldn't collect sales taxes from online retailers.