One of the perks of online shopping may be coming to an end. The U.S. Supreme Court on Thursday ruled in a 5-4 decision that states now have the authority to collect sales taxes from most online retailers. The decision overturns a ruling from 1992 that found merchants were not required to collect sales tax unless they had a physical presence in the state. Since most large online retailers (Amazon, Target, Walmart) are already collecting sales tax in every state, you're not likely to see a big change if that's where you shop.

But small business owners who sell online may soon have to navigate a complicated web to collect and pay sales tax in many different places. Here's what you should know about the ruling.


In the decision, written by Justice Anthony Kennedy, the court ruled that the physical presence requirement “has limited states' ability to seek long-term prosperity and has prevented market participants from competing on an even playing field.”

In his decision, Justice Kennedy cited a study that indicated online sales cost states between $8 and $33 billion every year in uncollected sales taxes (Alaska, Delaware, Montana, New Hampshire and Oregon do not have sales taxes). Proponents of an internet sales tax argue that the current law was written when mail-order catalogs drove remote shopping, and has since grown outdated with the rise of e-commerce.

Small businesses with a strong e-commerce presence may not be equipped to handle the logistical task of juggling myriad tax regulations.

With broad authority to collect sales tax from online retailers, state governments now have a sizable revenue source to tap into. Max Behlke, director of budget and tax policy for the National Conference of State Legislatures, told The Wall Street Journal that he expects state governments will examine their existing laws and might advance new policies within the next 60 days or so.


Retailing giants such as Amazon, Walmart, Target and others probably won’t see their operations change much following the Supreme Court’s decision. Amazon already pays sales taxes throughout the country (along with the other top 20 online retailers). Brick-and-mortar retailers that have a presence in most states already comply with local and state sales tax regulations, as well. What’s more, these companies have entire departments that handle the complexities of collecting and paying what’s due to the nation’s roughly 12,000 local and state taxing authorities.

Small businesses with a strong e-commerce presence, on the other hand, may not be equipped to handle the logistical task of juggling a myriad tax regulations if they come to fruition. There are millions of small businesses in the United States, most with fewer than 20 employees. The U.S. Business Administration in 2017 found that the average small business spends at least $12,000 every year on regulations ($83,000, on average, in the first year). Those business owners surveyed ranked tax-related laws as their top regulatory burden. If taxing authorities each pass their own regulations, that burden could significantly multiply.

Ann Whitely Wood, a small business owner in Texas, says it takes an entire business day to process sales taxes just for her in-state transactions. “If I had to do the same for 44 other states, the task of tracking my state sales taxes would consume 45 business days a year,” Whitely Wood wrote in an opinion piece for The Wall Street Journal.

In the dissenting opinion, Justice John Roberts warned that the court's decision could impair e-commerce in the U.S., which he said is a “significant and vibrant part of the national economy.” Justice Roberts used a few examples to illustrate how messy the tax picture can get: Illinois taxes Twix and Snickers differently, because Twix have flour but Snickers don't. Texas, Roberts wrote, "taxes sales of plain deodorant at 6.25 percent but imposes no tax on deodorant with antiperspirant."

Complying with all 45 states' sales tax laws for a small business owner will probably require help from a tax professional.

In South Dakota, the state at the center of the Supreme Court case, legislators passed a law in 2016 that required out-of-state sellers to collect and remit sales taxes “as if the seller had a physical presence in the state.” The law, however, exempted online retailers with less than $100,000 in annual sales or 200 annual transactions in the state. State or federal lawmakers could follow a similar model and carve out exceptions for small businesses.

Either way, there's likely to be a lot to watch in the coming months as states now react to the ruling and begin to seek more revenue from online purchases.

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