By Brent Kendall and Richard Rubin
WASHINGTON -- The Supreme Court on Friday said it would consider whether states can broadly require online retailers to collect sales taxes even if they lack a physical presence in the state, taking a case that could have a major impact on online commerce.
The justices agreed to hear an appeal by the state of South Dakota, which has been pushing a test case with the goal of overturning a high-court precedent that limits states' sales tax collections.
If South Dakota prevails, other states would likely begin taxing online and catalog sales from beyond their borders, ending an era in which consumers could save taxes by shopping inside their homes instead of in their local stores.
The Supreme Court, in cases from 1967 and 1992 involving mail-order businesses, said states can require merchants to collect sales tax only if they are physically located in the state. The court then said that state requirements on out-of-state retailers would impermissibly burden interstate commerce, an area that is regulated by Congress.
The retail landscape, however, has changed dramatically since then because of the growth of online only companies, which have undercut prices -- and hurt state coffers -- with tax-free sales. That shift hasn't gone unnoticed by the justices.
Justice Anthony Kennedy, for example, said in a 2015 opinion that the court in a future case should revisit its earlier decisions, "given these changes in technology and consumer sophistication."
The justices on Friday took up that call, explicitly agreeing to consider whether the earlier high-court precedent should be overruled.
"My bet is that they are looking at it to overturn," said Edward Zelinsky, a tax-law professor at Yeshiva University's Cardozo School of Law. The alternative, he said, would be to point to this issue as an example of where the legislative process should be primary and kick it back to Congress.
South Dakota, in its petition to the Supreme Court, said tax collection is now uncomplicated for large internet retailers. "Asking today's companies to undertake it when they do substantial business with a state's citizens imposes no undue burden," the state wrote.
A group of 35 other states urged the court to hear the case, saying the inability to require online merchants to collect sales tax was costing them billions of dollars and straining state budgets. Taxpayers are technically liable for the taxes even if an online retailer doesn't impose them, but such direct collections by state taxing authorities are rare.
Some states, like Colorado, have imposed requirements that online retailers report to state taxing authorities the amount of sales tax owed by customers, but Colorado says those efforts haven't closed the tax gap.
Also joining the push for Supreme Court review were brick-and-mortar retailers that say it undermines fair competition that they have to collect sales taxes but their online rivals don't.
Retailers and state officials cheered Friday's decision, and the National Retail Federation called it an "encouraging" sign.
South Dakota passed legislation in 2016 requiring merchants to collect and remit the taxes, then sued a handful of large online retailers to set its test case in motion. Courts in South Dakota blocked the law, saying they were bound by U.S. Supreme Court precedent.
"South Dakota is leading the nation to fight for Main Street America," said state Attorney General Marty Jackley. "I will give Main Street businesses a strong and long-awaited voice in our highest court."
Other states have been pursuing similar laws in a bid to get the issue in front of the high court.
Current defendants in the South Dakota case are Wayfair Inc., Overstock.com Inc. and Newegg Inc. The companies argued the court should decline to review the case, saying the question of online sales-tax collection was a policy matter best left to Congress.
EBay Inc. spokeswoman Penny Bruce said the company hopes the court will "clarify again that independent small businesses cannot be taxed in a state where they do not have facilities, employees or a voice in the local political process."
In 2013, the Senate passed a bill that would allow states to require sales-tax collection by out-of-state retailers. But Republicans are divided on the measure, and neither that bill nor other attempts to address the issue have reached the House floor.
Even if the court overrules its precedent and allows sales taxation outside state borders, Congress may need to act if states pass laws in tension with each other.
"The need for legislative action on e-fairness is more urgent than ever before," said U.S. Rep. Kristi Noem (R., S.D.) "If the Supreme Court rules in South Dakota's favor, it could become a marketplace free-for-all."
The online merchants said the issue of uncollected taxes "has proven to be largely self-correcting, as the largest online sellers collect sales tax in all states." They pointed to Amazon.com Inc., a behemoth in internet sales, that now collects sales tax for the states that impose it.
Amazon, which supports federal legislation to address the issue, has expanded its physical presence in various states over the past few years as part of its efforts to shorten delivery times. In many instances, however, third-party sellers using Amazon's platform don't collect sales taxes. Amazon declined to comment Friday.
If the Supreme Court overruled its past restrictions on the states, small and medium-size online businesses would suffer, Wayfair and its fellow defendants said.
The high court could hear oral arguments in the case as soon as April. If the court does schedule the case for the spring, a decision would be expected by the end of June.
Write to Brent Kendall at firstname.lastname@example.org and Richard Rubin at email@example.com
(END) Dow Jones Newswires
January 12, 2018 18:07 ET (23:07 GMT)
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