The state of South Dakota made an appeal to the U.S Supreme Court regarding the collection of sales taxes by online retailers. The proposal, if approved, could result in billions of dollars for states. The proposal was backed up by the Trump administration.
The 1992 ruling by the U.S. Supreme Court
A 1992 ruling by the U.S. Supreme Court exempts those retailers without a physical presence in a state from collecting sales taxes associated with the state. Internet retailers like Wayfair and Overstock.com were particularly favored.
South Dakota is currently urging the U.S Supreme Court to overturn this ruling in support of the collection of sales taxes by online retailers.
Can online retailers be required to pay taxes?
The U.S. Supreme Court stated that there is a high likelihood of the 1992 ruling to be overturned as it no longer fits the modern day trend of e-commerce platforms and online purchases, especially since the number of online shoppers is increasing by the second.
According to the current scenario, the 1992 rule that requires a physical presence for imposing taxes is no longer logical since there are very few brick-and-mortar stores left. Most of the purchases are now carried out exclusively through virtual markets.
In such cases, the need for a physical presence to collect taxes imposes a burden on states since they are not allowed to collect taxes that are meant to be collected lawfully.
According to the estimates by the U.S. Government Accountability Office, states and municipalities are eligible to collect between $8 billion and $13 billion a year if they were permitted to collect taxes from online retailers, especially since out of the fifty states, forty-five states impose sales tax statewide.
Strictly speaking, online retailers seem to have an unfair advantage over brick-and-mortar stores when it comes to taxes. The lack of a physical presence exempts online retailers from taxes while brick-and-mortar stores, though very little in number, are still expected to pay their dues.
In 2016, South Dakota enacted a law that required retailers without a physical presence in the state to collect due taxes on purchases. Once the law was enacted, a lawsuit was filed against the companies that were earlier favored.
Some of the companies complied with the law while a few others contested against it.