US Supreme Court Enables States to Collect Taxes on Online Sales Possibly Levelling the Playing Field in US Retail

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Key Points

  • On Thursday, June 21, the US Supreme Court ruled that American states have the right to collect taxes on e-commerce sales regardless of the physical location of the online retailer. The decision reversed a 1992 deliberation that granted a defacto tax break for pure-play retailers.
  • Share prices of major US online retailers were down on the day of the court ruling, although companies including Wayfair and Overstock.com discounted any major impact of the ruling on their business.
  • Supporters of the decision said that the Supreme Court ruling put an end to an unfair fiscal advantage enjoyed by pure-play retailers and will benefit the community by generating more tax revenues for the states. Opponents said that there could be a negative impact on smaller e-commerce retailers.
  • The impact of the Court’s decision will largely depend on how it will be implemented at the state level. Some states might introduce a minimum revenue threshold that should protect smaller players.

On Thursday, June 21, the US Supreme Court ruled that American states have the right to collect taxes on e-commerce sales regardless of whether the online retailer selling in their territory has a physical presence in the state or not.

The ruling, known as South Dakota vs. Wayfair, Inc.,reversed a 1992 deliberation, Quill Corp. vs. North Dakota,that exempted online retailers by paying taxes on sales made in states in which they do not have offices, warehouses or any other form of physical presence.

Following the Court’s decision, in the future states could require e-commerce retailers to collect sales taxes on transactions that occur within their territories, regardless of where the retailer is physically based. This could potentially generate significant additional tax revenues for the states.

Share prices of major US online retailers were down on the day of the court ruling, as shown in the figure below, although the implications of the decision on retailers’ share prices is not clear cut. For instance, Amazon already collects taxes on sales generated directly by Amazon.com in most US states, but does not for transactions of third-party retailers hosted on its platform. Both Wayfair and Overstock.com discounted any major impact of the ruling on their business, according to international news agency Reuters.


Source: S&P Capital IQ

Supporters of the Court’s decision, such as the lobby group Retail Industry Leader Association, said that the ruling put an end to a situation that was the result of a pre-internet era decision—the 1992 Quill Corp. vs. North Dakota deliberation—that gave an unfair advantage to pure-play retailers over brick-and-mortar retailers by granting the former with a defacto tax break.

South Dakota, together with other states, saw the 1992 deliberation as a damaging factor for smaller retail stores and detrimental for the state governments’ tax revenues. Brick-and-mortar retailer Walmart also commented positively on the decision, which, according to the company, will put an end to an unfair fiscal advantage enjoyed by pure-play retailers and will benefit the community by generating more tax revenues.

Detractors said that the decision could potentially have a negative impact on smaller e-commerce retailers and would leave unaffected e-commerce giants that have the resources to absorb the impact.

The impact of the Supreme Court’s decision will largely depend on how it will be implemented at the state level. Some states might introduce a minimum revenue threshold that should protect smaller players, following the example of a 2016 South Dakota law that requires e-commerce retailers that generate sales over $100,000 annually in the state to pay taxes.

 

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