WASHINGTON – The Supreme Court sounded concerned Tuesday about doing away with a rule that has meant shoppers don’t always get charged sales tax when they hit “checkout” online.
The justices were hearing arguments in a case that deals with how businesses collect sales tax on online purchases at sites from Amazon.com to Zappos. Right now, under a decades-old Supreme Court rule, if a business is shipping a product to a state where it doesn’t have an office, warehouse or other physical presence, it doesn’t have to collect the state’s sales tax. Customers are generally supposed to pay the tax to the state themselves if they don’t get charged for it, but the vast majority don’t.
More than 40 states have asked the Supreme Court to abandon its current sales tax collection rule, saying that as a result of it and the growth of internet shopping, they’re losing billions of dollars in tax revenue every year.
But several Supreme Court justices suggested during arguments Tuesday that they had concerns about reversing course.
“I’m concerned about the many unanswered questions that overturning precedents will create a massive amount of lawsuits about,” Justice Sonia Sotomayor told South Dakota Attorney General Marty Jackley, who was arguing for the court to do away with its current rule.
Chief Justice John Roberts pointed to briefs suggesting the problem of sales tax collection “has peaked” and may be “diminishing rather than expanding.” He asked: “Why doesn’t that suggest that there are greater significance to the arguments” that the court should leave its current rule in place?, he asked.
The fact that Congress could have addressed the issue and has so far hasn’t, Justice Elena Kagan said, “gives us reason to pause.” Congress can deal with the issue in a more nuanced way than the court, she said, saying Congress is “capable of crafting compromises and trying to figure out how to balance the wide range of interests involved here.”
Large retailers such as Apple, Macy’s, Target and Walmart, which have brick-and-mortar stores nationwide, generally collect sales tax from their customers who buy online. But other online sellers that only have a physical presence in a few states can sidestep charging customers sales tax when they’re shipping to addresses outside those states.
For years, the internet sales tax collection issue for states was largely about online giant Amazon.com, which didn’t collect sales tax in every state. But the site’s physical presence in states has grown, and since 2017 it has collected sales tax in every state that imposes one. Third-party sellers who sell goods on the site don’t have to, however.
Sellers who defend the current rule say collecting sales tax nationwide is complex and costly, especially for small sellers. Justices brought up that issue Tuesday too. Sotomayor expressed concern for the “added cost of doing business for the small businessman” if the court overturns its current rule. Justice Stephen Breyer asked: “What does it cost for a mandolin seller who sells mandolins on the internet to sell them in 50 states?” “How much does it cost him to enter that market?”
That complexity of collecting sales tax nationwide was a concern for the Supreme Court when in 1967 it said that a catalog retailer whose only contact with a state was by mail didn’t have to collect sales tax on sales made there. In 1992, the court reaffirmed what it called the physical presence rule. But states say software has now made collecting sales tax easy.
Three justices – Neil Gorsuch, Clarence Thomas and Anthony Kennedy – have expressed a willingness in past writings to rethink the sales tax collection rule. On Tuesday, Justice Ruth Bader Ginsburg seemed willing them to join them, suggesting the court’s past decisions were “obsolete precedent.” Both Ginsburg and Kennedy seemed to say the court should take responsibility for fixing the rule, which Kennedy suggested has, “especially in light of the cyber age, proven incorrect.”
The case the court heard arguments in has to do with a law passed by South Dakota in 2016, a law designed to challenge the Supreme Court rule. The law requires out-of-state sellers who do more than $100,000 of business in the state or more than 200 transactions annually with state residents to collect and turn over sales tax to the state.
South Dakota wanted out-of-state retailers to begin collecting the tax and sued Overstock.com, home goods company Wayfair and electronics retailer Newegg. The state has conceded in court, however, that it can only win by persuading the Supreme Court to do away with its current physical presence rule.
South Dakota Gov. Dennis Daugaard said in a telephone interview after Tuesday’s arguments that he hopes the court will fix the rule, but if it doesn’t, his state will continue to push for action by Congress.
The Trump administration, meanwhile, urged the justices to side with South Dakota. Like other online sellers, however, The Trump Organization’s official retail website doesn’t collect tax on sales to every state. Customers in only three states are charged sales tax on their purchases, whether it’s a polo shirt or Trump deodorant.
A decision in the case, 17-494, South Dakota v. Wayfair, is expected by the end of June.
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