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Supreme Court Ruling Likely to Bring New Sales Tax Revenues to States

© Krantz News Service, June 26, 2018


States will have broader reach in their taxing powers following the recent Supreme Court decision in South Dakota v. Wayfair.

Out-of-state sellers need no longer have a "physical presence" in a state to be compelled to collect and remit sales taxes to the consumer's state, the Court held in a 5-4 decision.

The ruling is a victory for those who have argued for a level playing field among sellers--that brick-and-mortar retailers were at a disadvantage for having to deal with sales taxes

The Court rejected the arguments of online sellers -- that South Dakota's sales tax act is unconstitutional, that the physical presence rule is clear and easy to apply, and that the ruling will especially burden start-ups and small businesses.

Justice Kennedy, who authored the Court's opinion, noted that South Dakota alone has lost an estimated $48 to $58 million annually in sales tax revenue under the physical presence rule.

"Particularly because South Dakota has no state income tax, it must put substantial reliance on its sales and use taxed for the revenue necessary to fund essential services," Kennedy wrote. "Those taxes account for over 60 percent of its general fund."

The other states without an income tax are Alaska, Florida, Nevada, Texas, Washington and Wyoming.

In an amicus brief the National Governors Association stated that the physical presence rule has significant nationwide impact: "State and local governments lost an extimated $26 billion in sales and use tax revenue in 2015 because they were unable to effectively collect owed taxes," the brief stated.

In a dissenting opinion, Chief Justice John Roberts noted the growth of online commerce and said the Court should not interfere with a ruling at this time.

He wrote: "E-commerce has grown into a significant and vibrant part of our national ecomony against the backdrop of established rules, including the physical-presence rule. Any alteration to those rules with the potential to disrupt the development of such a critical segment of the ecomony should be undertaken by Congress.

To follow the most recent developments in the states' responses to this decision, call us at 253-686-0406 or email us at bkrantz@legicrawler.com.

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