States will be able to force more shoppers to pay sales tax when they make online purchases under a Supreme Court decision Thursday that will leave shoppers with lighter wallets but is a big financial win for states.
Consumers can expect to see sales tax being charged on more online purchases — likely over the next year and potentially before the Christmas shopping season — as states and retailers react to the court's decision, said one attorney involved in the case.
The Supreme Court's 5-4 decision Thursday overruled two, decades-old Supreme Court decisions that states said cost them billions of dollars in lost revenue annually. The decisions made it more difficult for states to collect sales tax on certain online purchases, and more than 40 states had asked the high court to overrule them.
The cases the court overturned said that if a business was shipping a customer's purchase to a state where the business didn't have a physical presence such as a warehouse or office, the business didn't have to collect the state's sales tax. Customers were generally responsible for paying the sales tax to the state themselves if they weren't charged it, but most didn't realize they owed it and few paid.
Justice Anthony Kennedy wrote that the previous decisions were flawed.
"Each year the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the States," he wrote in an opinion joined by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito and Neil Gorsuch. Kennedy wrote that the rule "limited States' ability to seek long-term prosperity and has prevented market participants from competing on an even playing field."
The ruling is also a win for large retailers, who argued the physical presence rule was unfair. Large retailers including Apple, Macy's, Target and Walmart, which have brick-and-mortar stores, already generally collect sales tax from their customers who buy online. That's because they typically have a physical store in whatever state the purchase is being shipped to. Amazon.com, with its network of warehouses, also collects sales tax in every state that charges it, though third-party sellers who use the site don't have to.
Sellers that have a physical presence in only a single state or a few states have been able to avoid charging sales taxes when they shipped to addresses outside those states. Online sellers that haven't been charging sales tax on goods shipped to every state range from jewelry website Blue Nile to pet products site Chewy.com to clothing retailer L.L. Bean. Sellers who use eBay and Etsy, which provide platforms for smaller sellers, also haven't been collecting sales tax nationwide.
Under the ruling Thursday, states can pass laws requiring out-of-state sellers to collect the state's sales tax from customers and send it to the state. More than a dozen states have already adopted laws like that ahead of the court's decision, according to state tax policy expert Joseph Crosby.
Maryland officials were scrambling to estimate potential new revenue for the state. Republican Gov. Larry Hogan’s administration is reviewing the decision and will consult with the state comptroller's office to determine its impact.
Comptroller Peter Franchot, a Democrat, said in a statement that he was “exceedingly pleased” by the court’s decision and noted that Maryland was one of the states that had asked the high court to overturn its previous decision, which he called “fundamentally outdated and unfair.”
A November 2017 study by the U.S. Government Accountability Office estimated the gain for state and local governments in Maryland could be between $165 million and $252 million.
Franchot’s office was more conservative. Spokesman Joseph Shapiro said the potential added revenue for state government alone to be “in the ballpark of $100 million.” He said the agency will consult with the Maryland Attorney General to determine whether new regulations are needed to begin collecting taxes on online retailers that previously escaped the tax.
Shapiro said the Comptroller’s Office does not believe new legislation would be necessary.
Sen. Richard S. Madaleno Jr., who has sponsored legislation that would have challenged the exemption for out-of-state merchandise, disagreed. The Montgomery County Democrat, who is running for governor, said legislation may be necessary to create the small-business exemptions that helped persuade the Supreme Court majority to uphold the South Dakota law.
Madaleno said the decision is good for Maryland’s retail industry.
“To me it’s been a case where our tax code is unfair to people who have made an investment in people and facilities in Maryland,” he said.
Madaleno said that while Amazon has been paying sales taxes for about the last four years, Maryland can now expect to gain tax revenue from its sales representing third-party vendors. He said the added revenue could help the state fund college affordability programs or the enhancements to education expected to be recommended by a commission examining Maryland’s school aid formulas later this year.
Del. Anne Kaiser, who chairs the tax-writing House Ways & Means Committee, said the decision is something the state’s bricks-and-mortar stores have been seeking for years.
“How can it not be good news?” the Montgomery County Democrat said. She said she did not know whether new legislation would be required.
The losers, said retail analyst Neil Saunders, are online-only retailers, especially smaller ones. Those retailers may face headaches complying with various state sales tax laws, though there are software options to help. That software, too, can be an added cost.
Baltimore Sun reporter Mike Dresser contributed to this report.