WASHINGTON (Reuters) – States have broad authority to force online retailers to collect potentially billions of dollars worth of sales taxes, the U.S. Supreme Court ruled on Thursday, siding with South Dakota in its high-profile fight with e-commerce companies.
The justices, in a 5-4 ruling against Wayfair Inc, Overstock.com Inc and Newegg Inc, overturned a 1992 Supreme Court precedent that had barred states from requiring businesses with no “physical presence” in that state, like out-of-state online retailers, to collect sales taxes.
The court, in a ruling authored by conservative Justice Anthony Kennedy, revived a 2016 South Dakota law that required larger out-of-state e-commerce companies to collect sales tax, a mandate that the online retailers fought in court.
South Dakota was backed by President Donald Trump’s administration in the case. The law could yet face legal challenges on other grounds, Kennedy noted.
The ruling is likely to lead other states to try to collect sales tax on purchases from out-of-state online businesses more aggressively. It also likely will lead to many consumers paying more at the online checkout. Forty-five of the 50 states impose sales taxes.
Most states would need to pass legislation before seeking to collect the additional taxes, although some have already enacted laws or regulations similar to South Dakota’s.
The ruling opens the door to a new revenue stream to fill state coffers – up to $13 billion annually, according to a federal report – while imperiling a competitive advantage that e-commerce companies had over brick-and-mortar rivals that already must collect sales tax.
South Dakota has estimated that it could take in up to $50 million a year in additional revenue with these taxes being collected.
States like South Dakota that depend heavily on sales taxes for their revenue are likely to benefit most, with a predicted maximum revenue increase of around 3 percent, according to a Barclays research note.
The states that are likely to see the biggest percentage increase in revenue are Louisiana, Tennessee, South Dakota, Oklahoma and Alabama, according to the Barclays research.
Reporting by Lawrence Hurley; Editing by Will Dunham