Supreme Court Rules that States Can Tax Online Purchases

On Thursday, the Supreme Court issued a long-awaited decision holding that states have the authority to tax online purchases even if the retailer does not have a physical presence in the state.  This decision overturned 26 years of precedent requiring of retailers a physical presence in a state to mandate the collection of sales tax on online purchases. The Supreme Court case arose from a South Dakota law requiring taxation on all online purchases regardless of whether the retailer had a physical presence in the state. The court noted that exempting these purchases unfairly gives online retailers a competitive advantage over their brick-and-mortar counterparts. As Justice Kennedy noted in his opinion, the physical presence rule “produces an incentive to avoid physical presence in multiple States. Distortions caused by the desire of businesses to avoid tax collection mean that the market may currently lack storefronts, distribution points and employment centers that otherwise would be efficient or desirable.”

Opponents of the decision argue that taxing online sales places an undue burden on small internet retailers, who will struggle to administer tax collection in various jurisdictions. The South Dakota law addresses this concern by exempting small business with fewer than 200 annual customers or less than $100,000 in sales annually within South Dakota. Other states are expected to follow suit with similar restrictions on the taxation of small online merchants.

Not taxing internet sales as they increasingly have replaced brick-and-mortar retail has resulted in a significant decline in sales tax revenue for state and local governments. In a 2016 study, the National Conference of State Legislators, in conjunction with the International Council of Shopping Centers, estimated that states lose nearly $26 billion annually in lost sales tax revenue from out of state online purchases. The Supreme Court cited a study estimating closer to $33 billion in annual lost revenue. States must make up for this lost revenue in higher taxes elsewhere or through the cutting of public services and amenities.

CCIM Institute and the National Association of REALTORS® have been advocating for online taxation parity in collaboration with a coalition of like-minded association and industry partners over the past several years. CCIM Institute believes that economically equivalent transactions should bring similar tax consequences and supports a level playing fields for local in-store retailers and remote merchants. This decision is a win for commercial real estate, brick-and-mortar businesses, and state and local governments alike.