Online shopping prices likely to rise after new sales tax ruling

Chris Davies - Jun 21, 2018, 4:35pm CDT
Online shopping prices likely to rise after new sales tax ruling

A surprise Supreme Court ruling could make your next online shopping spree more expensive, after deciding that states can impose sales tax on internet purchases made from out-of-state retailers. The issue had been pushed to the fore by South Dakota, which had argued that its recent law insisting on applying tax even to purchases made online beyond the state’s borders should be upheld.

Thanks to a 1967 Supreme Court ruling, states have only been allowed to collect sales tax on a purchase made when the retailer has a physical presence within that state. At the time, the ruling was focused on mail-order catalogs, but it has held up even as shopping has transitioned to online instead. A “physical presence” could count as a store or headquarters, or other facility.

Back in 1967 though, it’s been argued, the proportion of out-of-state transactions to local retail was slim. Today, of course, online shopping represents a huge proportion of overall retail each year. South Dakota took that as a prompt to change its state laws, demanding that retailers – whether online or with a physical presence – must collect taxes on their sales to state residents.

Today the Supreme Court upheld South Dakota’s law, with a 5-4 decision that states could, indeed, force sales taxes on residents’ online purchases from out-of-state retailers. It’s likely to impact smaller to midsize vendors disproportionately, despite claims by some – including President Trump – that it will target behemoths like Amazon.

Since Amazon has a local presence in most states, in fact, it has been collecting sales taxes for customers located in the 45 states that actually collect them since April 2017. Indeed, Amazon had been in favor of online sales tax collection.

Unsurprisingly, consumer rights advocates aren’t especially pleased with the ruling. “Today, the Supreme Court applied bacon grease to the slippery slope of states taxing and regulating outside their borders,” Andrew Moylan, Executive Vice President of the National Taxpayers Union Foundation and head of the organization’s Interstate Commerce Initiative, said of the ruling. “For centuries, states have threatened the free flow of interstate commerce by attempting to tax and regulate businesses all across the country, regardless of location.”

“By validating South Dakota’s law today,” Moylan argues, “the Supreme Court has granted states the power to tax any business, anywhere in the country, simply for daring to use the internet to access a nationwide market.” The NTUF is now calling on Congress to take action and limit states power to apply sales taxes.

Without that, there’s theoretically nothing stopping a state from copying South Dakota’s laws and insisting that all online retailers above a certain size collect sales tax. The ruling explicitly exempts smaller businesses along with all but the most successful of individual sellers using, say, eBay or other online sales channels. Indeed, only those sellers that “deliver more than $100,000 of goods or services into the State or engage in 200 or more separate transactions for the delivery of goods or services into the State” each year will be affected, according to the decision.


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