Supreme Court Clears Way for Sales Taxes on Internet Merchants

WASHINGTON — Internet retailers can be required to collect sales taxes in states where they have no physical presence, the Supreme Court ruled Thursday.

Brick-and-mortar businesses have long complained that they are disadvantaged by having to charge sales taxes while many of their online competitors do not. States have said that they are missing out on tens of billions of dollars in annual revenue under a 1992 Supreme Court ruling that helped spur the rise of internet shopping.

On Thursday, the court overruled that ruling, Quill Corp. v. North Dakota, which had said that the Constitution bars states from requiring businesses to collect sales taxes unless they have a substantial connection to the state.

Shares in Amazon were down just 1 percent in morning trading after the ruling, at $1,731.59. But other e-commerce companies suffered far tougher blows: Shares in Etsy, the marketplace for artisanal crafts, fell 4.5 percent, to $42.21, while those in Wayfair, a popular home goods seller, were down 3.2 percent, at $112.42.

Writing for the majority in the 5-4 ruling, Justice Anthony M. Kennedy said the Quill decision had distorted the nation’s economy and had caused states to lose annual tax revenues between $8 billion and $33 billion.

“Quill puts both local businesses and many interstate businesses with physical presence at a competitive disadvantage relative to remote sellers,” he wrote. “Remote sellers can avoid the regulatory burdens of tax collection and can offer de facto lower prices caused by the widespread failure of consumers to pay the tax on their own.”

Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel A. Alito Jr. and Neil Gorsuch joined the majority opinion.

In dissent, Chief Justice John G. Roberts Jr. agreed that the court’s rulings in this area had been “wrongly decided.” But he said there were insufficient reasons to overrule the precedents and that Congress should have been left to address the matter.

“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,” the chief justice 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.”

Justices Stephen G. Breyer, Sonia Sotomayor and Elena Kagan joined the dissent.

In the years since 1992, three members of the Supreme Court had indicated that they might be ready to reconsider the Quill decision.

In a 2015 concurring opinion, for instance, Kennedy seemed to call for a fresh challenge to the decision.

“It is unwise to delay any longer a reconsideration of the court’s holding in Quill,” he wrote. “A case questionable even when decided, Quill now harms states to a degree far greater than could have been anticipated earlier.”

South Dakota responded to Kennedy’s invitation by enacting a law that required all merchants to collect a 4.5 percent sales tax if they had more than $100,000 in annual sales or more than 200 individual transactions in the state. State officials sued three large online retailers — Wayfair, Overstock.com and Newegg — for violating the law.

Kennedy singled out Wayfair, an online retailer of home goods and furniture. “Its advertising seeks to create an image of beautiful, peaceful homes, but it also says that ‘one of the best things about buying through Wayfair is that we do not have to charge sales tax,'” he wrote. “What Wayfair ignores in its subtle offer to assist in tax evasion is that creating a dream home assumes solvent state and local governments.”

Lower courts ruled for the online retailers in the South Dakota case, citing the Quill decision.

On Thursday, Kennedy wrote that world has changed since 1992, when mail-order sales totaled $180 million. “Last year,” he wrote, “e-commerce retail sales alone were estimated at $453.5 billion. Combined with traditional remote sellers, the total exceeds half a trillion dollars.”

Kennedy said the decision left open the possibility that some transactions were so small and scattered that no taxes should be collected. The court also did not decide whether states may seek sales taxes retroactively.

“These issues are not before the court in the instant case; but their potential to arise in some later case cannot justify retaining this artificial, anachronistic rule that deprives states of vast revenues from major businesses,” Kennedy wrote.

President Donald Trump has criticized Amazon for its tax and shipping practices. Amazon, which is not involved in the case before the Supreme Court, collects sales taxes for goods that it sells directly, but not for merchandise sold by third parties.

Some analysts have said Trump’s critique was motivated by his displeasure with reporting from The Washington Post, which is owned by Amazon’s founder, Jeff Bezos.

Roberts addressed Amazon in his dissent.

“Some companies, including the online behemoth Amazon,” he wrote, “now voluntarily collect and remit sales tax in every state that assesses one — even those in which they have no physical presence.” He added that small businesses will face new burdens in trying to comply with a tangle of tax laws, giving examples.

“Texas taxes sales of plain deodorant at 6.25 percent but imposes no tax on deodorant with antiperspirant,” Roberts wrote. “Illinois categorizes Twix and Snickers bars — chocolate-and-caramel confections usually displayed side-by-side in the candy aisle — as food and candy, respectively (Twix have flour; Snickers don’t), and taxes them differently.”

“One vitalizing effect of the internet has been connecting small, even ‘micro’ businesses to potential buyers across the nation,” he wrote. “People starting a business selling their embroidered pillowcases or carved decoys can offer their wares throughout the country — but probably not if they have to figure out the tax due on every sale.”