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Supreme Court Rules States Can Force Online Shoppers To Pay Taxes

June 21, 2018 - 5:03 pm
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WASHINGTON (WCBS 880/CBS News/AP) -- In a 5-4 ruling, the U.S. Supreme Court says states can force online shoppers to pay sales taxes.

The ruling is a win for states, which said they were losing out on billions of dollars annually under two decades-old Supreme Court decisions that affected online sales tax collections. 

“There was a 1992 ruling that said a state can’t require a retailer to collect taxes unless that retailer had a physical presence like a store or a warehouse in the state, Bloomberg’s Greg Stohr explained. “The Supreme Court overturned that, and the test is now going to be whether they have sort of economic connection to the state like a significant number of sales.”

"The Internet's prevalence and power have changed the dynamics of the national economy," the court said in its decision in the case, known as South Dakota v. Wayfair.

Under the previous law, some companies did not collect sales tax on every online purchase. Businesses were required to collect sales tax only when shipping products to a state where they had a physical presence, such as a warehouse or office. Otherwise, they didn't have to collect the state's sales tax.

Customers were generally supposed to pay the tax to the state themselves if they were not charged by the merchant, but the vast majority did not. Thirty-one states have laws taxing internet sales, according to the nonprofit Tax Foundation.

"If you're a pure-play online retailer and have very limited geography, say, one distribution center, this is going to be meaningful," said Charlie O'Shea, lead retail analyst at Moody's. "There are a lot of retailers out there that have only collected sales tax in states where they have to."

Not least of those is Amazon, a large part of whose business consists of sales made through other merchants operating on the site. While the e-commerce giant collects sales tax on all items it sells directly, third-party purchases are taxed in just two states, Washington and Pennsylvania. Those purchases could make up a third or more of Amazon's revenue, by some estimates.

Last year, third-party sales earned Amazon nearly $32 billion across the globe, according to SEC filings, and the business is growing rapidly. 

According to the Government Accountability Office, consumers pay taxes on roughly 80 percent of sales made by internet retailers. By contrast, people pay taxes on only about of a quarter of transactions handled by online marketplaces. 

For states, the decision could generate up to an additional $13 billion in sales taxes, according to Goldman Sachs. 

"Some states may keep their current tax collection laws in place, in which case collection rates are likely to increase, but others may have to modify their laws significantly to comply with today's decision," Goldman Sachs analyst Blake Taylor said in a research note.

Brick-and-mortar retailers are pleased with the decision, while some online retailers will be paying as little more, Stohr said.

“They think they’ve been at a competitive disadvantage. For a lot of online retailers like Wayfair; Overstock, they haven’t been collecting taxes everywhere they operate, and so they’re going to have to pay a little bit more,” he said.

Shares in Wayfair, an online vendor of home products, was down 2.5 percent Thursday, while shares of online craft marketplace Etsy dropped more than 3 percent. Amazon slipped half a percentage point. 

--CBS News' Irina Ivanova contributed reporting.

(© 2018 WCBS 880. CBS News and The Associated Press contributed to this report.)