State Taxes Required to be charged by Online Retailers

The Supreme Court just ruled that states can require online businesses to collect sales taxes, changing the landscape of how many online businesses operate and potentially impacting future revenue.

In a 5-4 decision, the Court sent a boost to brick-and-mortar stores, especially major retailers that have found it hard to compete with the growth of online shopping. Many consumers gravitated to online retailers because they didn’t have to pay state taxes, but now that consumers might be faced with higher costs, online retailers might find their sales decrease.

This new decision breaks with a previous ruling that barred states from imposing taxes on purchases their residents make from out-of-state retailers. According to the LA Times, the Supreme Court had argued that a state couldn’t require a retailer that did business within its borders to collect sales taxes unless the retailer had a physical presence in the state, such as offices or employees.

Some argue that this allowed online retailers to emphasize “tax-free” sales, giving them a competitive advantage.

Justice Kennedy wrote the majority opinion, saying the previous ruling put brick-and-mortar businesses at a disadvantage, because they had to charge a sales tax. He wrote that this practice "prevented market participants from competing on an even playing field.”

Large retailers like Walmart, who sell both online and have stores across the U.S., were already required to charge sales taxes even to online customers, because they had a physical presence in each state. The ruling is a huge win for them.

The states themselves will also see significant gains from the Court's decision. They now stand to make a collective $8 to $33 billion per year in previously uncollected taxes from online sales, according to estimates outlined in The Washington Post.

According to an article in The Washington Post, the Supreme Court decision affects small online businesses the most, since they risk losing crucial sales from customers who may now start returning to physical retail stores. Already, online businesses such as Overstock have felt the effects: their market shares fell after the announcement.

Chief Justice Roberts wrote the dissenting opinion, noting that the burden of the ruling "will fall disproportionately on small businesses.” He added: "One vitalizing effect of the internet has been connecting small, even ‘micro’ businesses to potential buyers across the nation.”

Roberts also argued that the issue should be handled legislatively, writing: “Any alternation to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress.”