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Supreme Court rules states can collect Internet sales taxes

WASHINGTON — States have the right to require Internet businesses to collect sales taxes on all sales within the state, even if the businesses have no physical presence there, the U.S. Supreme Court has ruled.

The 5-4 decision on June 21 was hailed by the National Governors Association, as well as trade groups such as the Tire Industry Association, the Auto Care Association and the National Retail Federation, as restoring fairness to retail sales.

However, Americans for Prosperity — a libertarian-conservation organization funded partly by the Koch brothers — decried the decision as an unwarranted extension of the right of states to tax business.

The case, South Dakota v. Wayfair, overturned a 1992 case, Quill v. North Dakota, in which the high court ruled it was unconstitutional for states to collect sales taxes from businesses that had no physical presence or other assets in those states.

The new case began when the South Dakota legislature — recognizing that the state was losing between $48 million and $58 million annually in sales taxes from Internet sales — passed a law requiring sales tax from all out-of-state sellers that made at least 200 transactions or at least $100,000 worth of sales in the state each year.

The respondents, all top online retailers, sought summary judgment, arguing that the South Dakota law was unconstitutional. The trial court granted their motion, and the South Dakota Supreme Court affirmed, citing Quill v. North Dakota as the precedent.

However, Justice Anthony Kennedy described the “physical presence” rule advanced in Quill as “unsound and incorrect” in writing the majority opinion.

“The physical presence rule has long been criticized as giving out-of-state sellers an advantage,” Justice Kennedy wrote. “Each year, it becomes further removed from the economic reality and result in significant revenue losses to the states.”

Roy Littlefield IV, TIA’s director of government affairs, said taxation of online sales was one of the issues TIA members discussed with Capitol Hill staffers during TIA Federal Lobby Day, which was held the day before the Wayfair ruling came down.

“TIA is very encouraged by the Supreme Court decision,” Mr. Littlefield said. “This has been an issue that our members have worked on tirelessly for many years.”

The ACA also hailed the ruling.

“This is an important decision,” Aaron Lowe, ACA senior vice president, regulatory and government affairs, said. “We are pleased that the Supreme Court saw the unfairness in the current system and determined to make everyone play by the same rules.”

NRF President and CEO Matthew Shay agreed.

“Retailers have been waiting for this day for more than two decades,” he said. “The retail industry is changing, and the Supreme Court has acted correctly in recognizing that it’s time for outdated sales tax policies to change as well.”

South Dakota Gov. Dennis Daugaard, a member of the NGA Legal Affairs Committee, praised the ruling as one of fairness for traditional retailers.

“States have long fought the battle for Main Street businesses, and now with today’s ruling, all businesses will compete on a level playing field,” Mr. Daugaard said.

Americans for Prosperity, however, slammed the ruling.

“Today’s Supreme Court decision opens the floodgates to states asserting the power to tax and regulate any business, anywhere across the country, regardless of their physical location, simply because they use the Internet,” Mary Kate Hopkins, the group’s policy manager, said.

“Allowing states to reach across borders and collect state taxes from online retailers is taxation without representation that will harm small businesses the most,” Ms. Hopkins said.

Justices Ruth Bader Ginsburg and Samuel Alito joined with Justice Kennedy in his opinion, while Justices Clarence Thomas and Neil Gorsuch wrote separate but concurring opinions. Chief Justice John Roberts wrote the dissent, in which Justices Stephen Breyer, Elena Kagan and Sonia Sotomayor joined.

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