GT Reilly Company
  • Webtax Guide
  • Contact Us
  • Twitter Facebook Linked in

Call GT Reilly CPAs   617.696.8900


Supreme Court rules that states may require sales tax on online purchases

Jun 21, 2018

If you are a regular online shopper and accustomed to saving money by not paying sales taxes, the U.S. Supreme Court has some bad news for you. The Court has ruled that states may require online sellers to charge sales tax, even if the sellers have no physical presence in their states.

The ruling handed down on June 21, 2018, in South Dakota v. Wayfair effectively reverses a 1992 Court ruling that held that states could require retailers to collect sales tax only if the sellers had a physical presence within the states’ borders, such as a brick-and-mortar store.    

States, which are estimated to lose nearly $15 billion annually in sales tax revenue to online sales, are expected to respond quickly.

Massachusetts will likely be among the first, as the Commonwealth has been angling for ways to tax online sales for a while. Massachusetts has long required taxpayers to pay a “use tax” for purchases made online or in other states. But few individual taxpayers actually report such purchases to the state, and the use tax is rarely enforced for them, though it is regularly enforced for businesses.

In a novel approach, Massachusetts last year attempted to define internet “cookies” as a presence in the state, and announced that it would collect sales taxes for online purchases on that premise. But under threat of a lawsuit by online retailers, the Commonwealth dropped the effort days before it was to take effect.

The Supreme Court ruling will have little effect on major retailers such as Amazon and Walmart, as they already collect sales taxes for internet purchases and forward the funds to the states in which their customers made their purchases. However, analysts anticipate that online sellers of specialty products, such as furniture and appliances, will see some of their sales revert to local brick-and-mortar stores as the tax-free benefit of buying big-ticket items online evaporates for consumers.

Impact on businesses

Some businesses that sell online may find that they have to register with the tax authorities of other states and obtain sales tax permits for the first time. At the very least, all businesses that sell online and do not currently collect sales tax should learn whether they will be subject to the requirement in each state in which they sell.

Complicating the matter for business is the fact that they now may be subject not only to the sales tax regimes of 50 states, but also of more than 11,000 municipal and special taxing entities.

The Court’s ruling allows states to exempt smaller online retailers from the sales tax requirement by setting a sales benchmark at which the tax would kick in. South Dakota, which was at the center of the court case, exempts online sellers with less than $100,000 of sales revenue from within the state.

Writing for the majority in the 5-4 ruling, Justice Anthony Kennedy stated:

"The Internet's prevalence and power have changed the dynamics of the national economy…. Each year the physical presence test becomes further removed from economic reality and results in significant revenue losses to the states."

If you have questions about how this Court ruling may affect you or your business, please contact us.

Back to Archives

Sign up for our newsletter

Stay informed about our latest blog posts and firm news by signing up for our monthly newsletter