Siding with South Dakota, the U.S. Supreme Court ruled Thursday that states should be able to require online retailers to collect and remit state sales taxes, a decision with wide-ranging implications for state finances across the country and one that could open the door to additional tax revenue for Massachusetts.
The court ruled 5-4 in South Dakota vs. Wayfair, a petition of that state seeking to have the high court throw out its 1992 Quill vs. North Dakota decision that states may not collect sales tax from remote retailers unless those retailers have a physical presence within their state.
Wayfair is a Boston-based online retailer of home goods.
Justice Anthony Kennedy wrote the majority opinion of the court, joined by Justices Clarence Thomas, Ruth Bader Ginsberg, Samuel Alito and Neil Gorsuch. Chief Justice John Roberts wrote the dissent, which was joined by Justices Stephen Breyer, Sonia Sotomayor and Elana Kagan.
"It is not clear why a single employee or a single warehouse should create a substantial nexus while 'physical' aspects of pervasive modern technology should not," Kennedy wrote. "For example, a company with a website accessible in South Dakota may be said to have a physical presence in the State via the customers' computers. A website may leave cookies saved to the customers’ hard drives, or customers may download the company’s app onto their phones."
In the dissenting opinion, the chief justice wrote that it should be left up to Congress to regulate commerce and that the court's ruling may have torpedoed attempts by Congress to find a legislative solution that could apply to all states.
"Armed with today's decision, state officials can be expected to redirect their attention from working with Congress on a national solution, to securing new tax revenue from remote retailer," Roberts wrote.
With the door open to states pursuing their own approaches to collecting sales taxes from online sellers, Roberts argued that having different sets of regulations in different states "will likely prove baffling for many retailers" and that the "burden will fall disproportionately on small businesses."
"Texas taxes sales of plain deodorant at 6.25 percent but imposes no tax on deodorant with antiperspirant," Roberts wrote. "Illinois categorizes Twix and Snickers bars — chocolate and caramel confections usually displayed side-by-side in the candy aisle — as food and candy, respectively (Twix have flour; Snickers don’t), and taxes them differently."
In Massachusetts, the federal court's ruling was the second major legal victory this week for the Retailers Association of Massachusetts (RAM), which on Monday celebrated the state Supreme Judicial Court's decision to invalidate a proposed ballot question that would have imposed a surtax on income over $1 million. The "millionaire's tax" decision cleared the way for RAM to accept a major legislative deal on Beacon Hill that could result in rising minimum wages, but also the elimination of extra pay on Sunday and a permanent summer sales tax-free weekend.
Ought To Be Debated In July?
RAM President Jon Hurst said he was "breathing a huge sigh of relief" after accepting the so-called "grand bargain" and agreeing to drop his proposal for a sales tax cut to help brick-and-mortar retailers.
"The biggest risk that we took by taking the grand bargain was that the Supreme Court would go the other way on Wayfair," he said. "We were hoping and hoping the decision would come down long before even the millionaire's tax decision, but it worked out."
Hurst said double-digit growth in retail sales has been occurring for over a decade online, with those gains eluding "Main Street" stores.
"It's great news for small business across the commonwealth. It's also great news for the commonwealth itself. Overnight, it's about $300 million in new tax revenue for the commonwealth. That should make a whole lot of people happy," Hurst said.
Senate President Harriette Chandler said on Twitter that the Supreme Court ruling softens the blow of losing the "millionaire's tax" fight, which most Democrats on Beacon Hill supported.
Administration and Finance Secretary Mike Heffernan and Department of Revenue Commissioner Chris Harding were not immediately available to discuss the decision, but Gov. Charlie Baker has shown an interest in trying to tax online sales.
"I think DOR will say that they can implement this themselves as regulation, but I've got to think there is some legislation to really outline this that can be good. This ought to be a subject to be debated in July," Hurst said.
House Minority Leader Brad Jones was reading the court's decision Thursday and said that if the Legislature wants to "have a debate about it, it should be considered in the context of lowering the rate of the sales tax," which is not a popular idea among legislative Democrats.
The Republican predicted that efforts were already underway in the State House to find a way to make the ruling benefit Massachusetts.
"We've gotten a lot better with nexus and the way that we've established it, so I don't know that there would be as much, financially, to gain," Jones said. "But I'm sure that in light of the recent SJC decision on the millionaire's tax, those people in the State House who were practically or probably were crying at the loss of this money that they already spent 12 times over, I'm sure they're already looking under every rock and in every nook and cranny for any nickel they can find."
Millions More In Tax Revenue
Under current federal law, online retailers do not have to collect and remit sales taxes from customers to states where the company does not have a physical presence. Traditional brick and mortar retailers have long pushed for Congress to change the law, arguing the loophole gives online retailers an unfair competitive advantage.
"In the states, a reminder, 31 states currently have laws taxing internet sales. Today's decision will certainly change how states look at these laws but we may see states trying to see if their versions could survive even if they are less simplified and direct ways than South Dakota's law," Tax Foundation Executive Vice President Joseph Bishop-Henchman wrote Thursday morning. "This ruling is not a blank check for states. The Court specifically observed that South Dakota's law, and its tax laws generally, minimizes the burden on interstate commerce. Other states should craft their laws accordingly."
Had state and local governments been able to require sales tax collection from all remote sellers in 2017, total government revenue collections would have been between $8 billion and $13 billion greater, according to a report issued late last year by the U.S. Government Accountability Office.
For Massachusetts, the ability to require sales tax collection from all online sellers last year would have meant between $169 million and $279 million, the GAO report found.
Moody's senior analyst Chandra Ghosal said the decision is "credit positive for states and local governments, particularly for states that rely most heavily on sales taxes to support their budgets."
Massachusetts officials are counting on more than $4.5 billion in sales tax revenue in fiscal 2019, which begins on July 1, to balance a budget over $40 billion.
In his budget proposal put forward a year ago, Baker laid out a plan to begin by July 1, 2017 to collect sales taxes from online retailers who do not have a physical presence in Massachusetts, but do more than $500,000 in sales in the Bay State annually.
Amazon, the largest internet retailer in America, began collecting sales taxes from its Massachusetts customers in 2013 after reaching an agreement with former Gov. Deval Patrick's administration.
When they rolled out the budget last year, Baker administration officials said they had the legal authority to effectuate the change without legislation and that it did not require a change in federal law.
Instead, the DOR sought to make the change through the regulatory process, a more time consuming and public exercise that prevented the state from immediately accessing a revenue stream that Baker and legislators expected to generate $30 million for the fiscal 2018 budget.
DOR filed its regulation and held a public hearing on it in August, putting it in place with an October 1 effective date. That regulation has already been challenged — a suit against DOR filed by electronics retailer Crutchfield Corporation is pending in the Virginia court system.
Since the regulation took effect, more than 250 businesses have registered with DOR to collect and remit the sales tax, the agency said.
Massachusetts' approach, though, has attracted attention around the country because it seeks the same end as the South Dakota case — a state being authorized to require online retailers to collect sales tax — but goes about it in a way that does not require a change in federal law.