In delivering a long-awaited decision on Thursday, the U.S. Supreme Court closed a decades long tax loophole that gave online-only retailers an unfair advantage over local brick-and-mortar businesses. The decision in South Dakota v. Wayfair means that online retailers will likely be required to collect state sales tax very soon, just like their brick-and-mortar counterparts. It’s a win for small businesses that often struggle to compete with online retailers’ low prices and a victory for states that could soon see a boost in their economies.
South Dakota sued Wayfair and other online retailers after they failed to collect sales tax on online purchases made by South Dakota residents. Previously, states did not have the power to require retailers that did not have a physical presence in their borders to collect and pay sales tax to the state. South Dakota attempted to circumvent the “physical presence” requirement by enacting a law in 2016 that required online retailers to collect sales tax. The law applied only to large online retailers – those with at least $100,000 in sales or 200 transactions in the state.
On Thursday, the Supreme Court overruled two outdated decisions and upheld the South Dakota law. As a result, South Dakota – and other states – can require large online retailers to collect and pay state sales tax. In the Court’s opinion, Justice Kennedy called the loophole created by the old policy “flawed” and “arbitrary.” He went on to explain that the old policy was based on the administrative challenges that large retailers would face in collecting sales tax in many different states. With modern technology, however, the loophole is no longer justified.
“Modern e-commerce does not align analytically with a test that relies on [physical presence],” Justice Kennedy wrote. “This Court should not maintain a rule that ignores … substantial virtual connections to the state.”
Supporters of small and independent businesses celebrated Thursday’s ruling. For the Institute for Local Self-Reliance, senior researcher Olivia LaVecchia wrote, “It’s an important day for independent businesses: After years of being forced to compete at a significant price disadvantage, locally owned businesses finally have a shot at a more level playing field when it comes to sales tax.”
After the South Dakota v. Wayfair decision, states can adopt laws that require online retailers to collect sales tax. As a result, local economies will benefit from greater tax revenues. They may also benefit from more local purchases, as small and independent businesses get a more level playing field in the competitive retail market.
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