WASHINGTON — The Supreme Court sounded concerned Tuesday about doing away with a rule that has meant consumers don’t get charged sales tax on some online purchases.
The justices heard arguments in a case that deals with businesses’ collection of sales tax on online purchases. 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.
More than 40 states are asking the Supreme Court to abandon that rule, however. They say that as a result of the rule and the growth of internet shopping, they’re losing billions of dollars in tax revenue every year.
But several Supreme Court justices suggested that Congress should act to correct the problem if it sees an issue, not the court. Justice Elena Kagan called the issue a “very prominent” one that Congress is aware of, and she suggested a high bar for those who want the court to overrule its past decisions. Chief Justice John Roberts suggested that perhaps the problem “has peaked” and is “diminishing.”
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. Customers are generally supposed to pay the tax to the state themselves, but the vast majority don’t.
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. Justice Sonia Sotomayor expressed concern for the “costs that we’re going to put on small businesses” if the court overturns its current rule. Justice Stephen Breyer put it slightly differently. “What does it cost the mandolin seller?” he asked, acknowledging they were good arguments on both sides.
That complexity of collecting sales tax nationwide was a concern for the Supreme Court when it first addressed the issue in a case involving a catalog retailer in 1967. The court reaffirmed the rule in 1992. 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 court’s 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.”
The case the court is hearing has to do with a law passed by South Dakota in 2016, a law designed to challenge the Supreme Court’s physical presence 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.
The state 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.
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