Battle over sales taxes on online purchases heads to Supreme Court

Gov. Phil Murphy

Gov. Phil Murphy

In 2017, an audit of the Federal Government Accountability Office indicated that states missed the opportunity to collect some $13.7 billion due to the Supreme Court law on state tax for online purchases.

If it's reversed, that could mean all online retailers have to collect taxes everywhere. They say they're losing out on "billions of dollars in tax revenue each year, requiring cuts to critical government programs" and that their losses compound as online shopping grows.

The ability to avoid paying sales tax was one of the attractions of online shopping in its early days. The online giant is said to account for more than 40 percent of US online retail sales. Although all collect taxes in other parts of the country - 25 states for Wayfair, eight for Overstock and six for Newegg - they've been able to skirt South Dakota because they don't have a physical presence there.

South Dakota is asking the nine justices to overturn a 1992 Supreme Court precedent that states can not require retailers to collect state sales taxes on purchases unless the businesses have a "physical presence" in the state.

The case is especially timely since President Donald Trump has publicly blasted Amazon for not collecting sales taxes, even though it does so on its own sales. Sellers on eBay and Etsy, which provide platforms for smaller sellers, also don't collect sales tax nationwide.

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Amazon, which is not involved in the Supreme Court case, collects sales taxes on direct purchases on its site but does not collect taxes for items sold on its platform by third-party venders, constituting around half of total sales. However, the vast majority of purchasers do not pay tax on these transactions (98-99%), and it's likely that many aren't even aware of this law. Wayfair argues more than 16,000 different taxing units could demand sales tax collections.

Out-of-state sellers disagree, calling it costly and extraordinarily complex, with tax rates and rules that vary not only by state but also by city and county.

The Trump administration will join the oral argument in favor of online retailers being required to collect sales taxes everywhere.

South Dakota says the high court's previous decisions don't reflect today's world. The state is urging the court to let sales taxes be imposed on companies with an "economic presence" in a state - a test South Dakota says its law would pass. "These online companies have taken advantage of a bygone decision in order to evade the tax collection duties that their brick and mortar competitors perform every day". Its inaction is why White and other opponents of the physical-presence rule say the court needs to step in.

It's unclear how the justices might align on the question this time. Three current justices - Clarence Thomas, Anthony Kennedy and Neil Gorsuch - have already expressed doubts about the precedent. "A connection to a shopper's favorite store is a click away regardless of how close or far the nearest storefront".

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