The U.S. Supreme Court cleared the way for states to collect sales taxes on internet commerce Thursday, overturning a 1992 decision that limited state tax collection to businesses with a physical presence in their jurisdiction.
Justice Anthony Kennedy delivered the Court’s opinion for a five-justice majority, which included Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito, and Neil Gorsuch.
“The physical presence rule has long been criticized as giving out-of-state sellers an advantage,” Kennedy wrote. “Each year, it becomes further removed from economic reality and results in significant revenue losses to the states.”
The 1992 decision, Quill v. North Dakota, involved North Dakota’s attempt to collect a state use tax from the Quill Corporation, a mail-order office equipment company. In an 8-1 opinion, the Court concluded the state was interfering with interstate commerce by taxing businesses outside their jurisdiction.
Thursday’s case was occasioned in 2016 when South Dakota adopted a law requiring e-commerce merchants to remit sales tax payments to the state government. While many states have already imposed sales taxes on e-commerce, in most cases there is no mechanism for internet merchants to transmit those funds to state officials.
South Dakota estimates that it loses $50 million per year to lost sales tax revenue. One federal report suggested the states lose $13 billion in annual revenue, due to their inability to collect taxes from remote sellers.
Forty-one states and the District of Columbia files amicus (or “friend-of-the-Court”) briefs supporting South Dakota’s position at the high court. (RELATED: Supremes Duck Major Ruling On Partisan Gerrymandering)
In his opinion for the Court, Kennedy explained that the physical presence requirement puts brick-and-mortar businesses at a disadvantage, since they have to comply with a tax regulatory burden their digital competitors escape. This state-driven economic discrimination, he said, violates the Constitution’s commerce clause.
He also noted that the Quill decision distorts the market, since it encourages internet sales behemoths like Amazon to avoid opening support centers or distribution hubs that would trigger the physical presence rule.
“Rejecting the physical presence rule is necessary to ensure that artificial competitive advantages are not created by this Court’s precedents,” he wrote.
Critics of Thursday’s decision warn the ruling will disproportionately affect small-scale sellers, particularly individual merchants on platforms like Etsy, who will now have to comply with 50 different tax regimes. They also fear these new regulatory burdens will hinder innovation and blur the lines of political accountability.
“Today the Supreme Court said ‘yes—you can be taxed by politicians you do not elect and who act knowing you are powerless to object,'” said Grover Norquist, president of Americans for Tax Reform. “This power can now be used to export sales taxes, personal and corporate income taxes, and opens the door for the European Union to export its tax burden onto American businesses—as they have been demanding.”
Chief Justice John Roberts dissented, joined by Justices Stephen Breyer, Sonia Sotomayor, and Elena Kagan. Roberts argued Congress, not the Court, should reformulate the physical-presence requirement.
“E-commerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical-presence rule,” Roberts wrote. “Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress.”
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