Internet Sales Taxes Divide U.S. Supreme Court Justices

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Story image for internet news from Bloomberg

U.S. Supreme Court justices signaled they are divided about whether to let states start collecting billions of dollars in sales taxes from internet retailers that don’t currently charge tax to their customers.

Hearing arguments in Washington Tuesday in a South Dakota case, the justices considered overturning their 1992 ruling that made much of the internet a tax-free zone by exempting retailers that don’t have a physical presence in a state.

States and traditional retailers say the 1992 ruling, which involved a mail-order company, is obsolete in the e-commerce era. Broader taxing power would let state and local governments collect an extra $8 billion to $23 billion a year, according to various estimates.

Three justices — Anthony Kennedy, Neil Gorsuch and Clarence Thomas — have already indicated they would overturn the 1992 ruling, known as Quill v. North Dakota.

In Tuesday’s hour-long argument, Justice Ruth Bader Ginsburg suggested she would join them, twice referring to the Quill precedent as “obsolete.” She said letting states tax internet sales would mean “equalizing sellers.”

But Justices Sonia Sotomayor and Samuel Alito indicated they would rather leave it to Congress to overturn the Quill ruling. Sotomayor said the real problem for states was not Quill but the absence of a mechanism for collecting the taxes directly from consumers.

“So find a way to collect from them,” she told South Dakota’s lawyer.

The high court fight centers on a South Dakota law enacted with the explicit aim of overturning Quill. The state is suing Wayfair Inc., Overstock.com Inc. and Newegg Inc., which don’t collect tax in South Dakota.

Amazon.com Inc., the biggest online retailer, isn’t directly involved. When selling its own inventory, Amazon charges sales tax in states that impose one, but about half of its sales involve goods owned by third-party merchants. For those items, the company says it’s up to the sellers to collect any taxes, and many don’t.

South Dakota is urging the court to ditch the “physical presence” rule and let sales taxes be imposed on any company with an “economic presence” in a state. South Dakota’s law would require retailers with more than $100,000 in annual sales in the state to pay a 4.5 percent tax on purchases.

The Trump administration is backing South Dakota in the case, urging that Quill be overturned or at least limited to catalog sales.

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