By Brent Kendall, Jess Bravin and Richard Rubin
States have the authority to require online retailers to collect sales taxes, the Supreme Court ruled Thursday, erasing a price advantage internet merchants have had in wooing consumers from real-world stores for 25 years.
The court, in a 5-4 decision written by Justice Anthony Kennedy, ruled that states can require internet merchants to collect the taxes even if a merchant has no physical presence in the state.
The court cited studies suggesting that the current rule costs states up to $33.9 billion a year in uncollected sales taxes.
Justice Kennedy said the old rule "limited states' ability to seek long-term prosperity and has prevented market participants from competing on an even playing field."
The ruling likely will spell the end of an era in which consumers could save on taxes by purchasing goods online instead of from local merchants.
The justices' decision overturned a 1992 high court ruling involving mail-order businesses that said states can only require tax collection by merchants who are physically located in the state's borders.
The ruling is a victory for states that argued tax-free internet sales were costing them billions of dollars in revenue. It is also a big win for brick-and-mortar stores, which have to compete against online rivals that don't have to collect the taxes on internet purchases.
Some large online retailers, such as Amazon.com Inc., already collect state sales tax on products they sell directly, but others don't. Amazon also hasn't collected the taxes for most independent merchants who sell items on Amazon's platform.
The case before the high court was brought by the state of South Dakota, which enacted a law in 2016 that required merchants to collect the tax. The state then set the stage for test litigation by suing out-of-state online sellers including Wayfair Inc., Overstock.com Inc. and Newegg Inc.
The companies' stocks moved lower after the decision was released. Amazon's was down a little more than 1%, while Wayfair's stock dropped nearly 7% before recovering slightly. Etsy's stock fell about 5%, and eBay's was down about 2% in recent trading.
State legislators and big-box stores had been unsuccessful for years in pushing Congress to give states the authority to require sales-tax collection. The U.S. Senate passed a bill in 2013, but it died in the House, caught in a fight between anti-tax Republicans and Republicans who back the brick-and-mortar retailers.
Thursday's opinion is likely to spur a new push for a federal law to limit states' ability to require tax collection by small businesses and to restrain cross-border audits. This time, however, it will be Internet retailers and catalog businesses seeking guardrails on state action, and they'll have the burden of mustering majorities in a Congress.
"We are now really comfortable with Congress continuing its path of not acting on this issue," said Max Behlke, director of budget and tax policy for the National Conference of State Legislatures.
States are expected to examine their existing laws and consider implementing new ones, Mr. Behlke said. "It's not like tomorrow the world's going to change. But in the next 60 days, I think we'll see states start to move forward," he said.
Steve Delbianco, president of NetChoice, an e-commerce trade group, said Congress should act immediately to create rules for states and retailers to follow.
"A brick-and-mortar business won't have to comply with the differing rules of over 12,000 tax jurisdictions, or integrate costly and complex tax software into its operations," Mr. Delbianco said in a statement. "But small web businesses will, eating away at their already razor-thin profit margins. When these businesses disappear, consumers will be the biggest losers."
The decision produced an unusual split among the justices. Joining Justice Kennedy were three of his conservative colleagues, Justices Clarence Thomas, Samuel Alito and Neil Gorsuch, as well as liberal Justice Ruth Bader Ginsburg.
Justice Kennedy's opinion eliminates the physical-presence test but doesn't set out a bright-line rule about exactly when a state's sales-tax collection law might impose an impermissible burden on interstate commerce.
Justice Kennedy did note that the South Dakota law at issue wouldn't apply retroactively, included an exception for small business and offered retailers software and clear definitions to help merchants comply with the sales tax requirement.
Chief Justice John Roberts wrote for the dissenters, joined by liberal Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan.
"E-commerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical-presence rule," the chief justice wrote. "Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress."
--Laura Stevens contributed to this article.
Write to Brent Kendall at email@example.com, Jess Bravin at firstname.lastname@example.org and Richard Rubin at email@example.com
(END) Dow Jones Newswires
June 21, 2018 12:29 ET (16:29 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.