Over the past few years a growing number of big internet retailers have started collecting sales tax on some or all purchases and passing the taxes on to state governments.

States have been pushing Amazon and other companies to collect sales tax for years, arguing that the rise of internet shopping has led to a loss of revenue for states. But up until recently courts had largely ruled that online retailers only had to collect taxes in states where they had a physical presence (such as local stores, warehouses, or distribution centers).

Now the US Supreme Court has ruled that states may require internet stores to collect sales tax even if those stores have no physical connection to the state.

In other words, say goodbye to tax-free online shopping.


To be clear, shoppers have actually always been required to pay sales tax on internet purchases. It’s just that internet retailers weren’t always required to collect taxes if they didn’t have a physical presence in a state.

So if you bought a $1000 TV from an online retailers in a state with a 6 percent sales tax, you were supposed to send a check for $60 to your state government. It’s just that almost nobody actually did that, and the states didn’t have a good way for keeping track of your online purchases.

The new ruling, in the case of South Dakota vs. Wayfair, Inc. overrules a 1992 decision (Quill Corporation v North Dakota), which had set up the physical-presence requirement.

A lot of things have changed since then… and it’s arguable that part of the reason for that is because of the sorta, kinda tax-free shopping experience that the internet made possible. Would Amazon have become as big as it has if the company had to change the same sales tax rates as bricks and mortar competitors such as Walmart, Best Buy, and Barnes & Noble (Amazon started as an online book store)?

Maybe. The efficiencies of scale would still have been there, allowing Amazon to offer competitive pricing by avoiding the costs associated with physical stores. But it probably would have taken longer and maybe the company would have faced more competition.

Right now Amazon collects sales tax on first-party goods it sells in states that have a sales tax. The new ruling doesn’t automatically require Amazon and other companies to charge tax on third-party goods, but it paves the way for states to start enacting laws that will require online retailers to do so.

via NY Times and Washington Post


To be clear, customers who shop


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10 replies on “US Supreme Court ruling lets states collect sales tax from Internet retailers”

  1. “In other words, say goodbye to tax-free online shopping.”

    Simple solution — take up residency (or do your shopping) in Delaware, Montana, New Hampshire, or Oregon, or a district in Alaska which does not impose a municipal sales tax.

    1. Other than Oregon (somehow they fund services without a sales tax) there is a problem from not having a sales tax. State services are minimal at best — especially in New Hampshire. Good luck if you are poor or fall on hard times — if the service isn’t federally required it isn’t available.

  2. It was only a matter of time… government is huge and getting bigger. It started with specialized tax on cigarettes. Then I read about specialized taxes of sugary stuff. Marijuana… tax income. Gambling… more money for the state. At some point, there won’t be enough money to feed the monster. Even our police force has become a money collection scheme with monthly quotas. (or maybe I shouldn’t be reading so many dystopian novels)

  3. Assuming the states pass laws to collect sales tax from all online retailers, it won’t be long before there’s a whole bunch of services available to online sellers of all sizes that will collect the appropriate amount of sales tax based on the address of the customer (it’s just a database, after all), and deliver the accumulated totals to the appropriate state tax authorities once a month, or year, etc.

    It would certainly help if the states collaborated on a central database that included all the state and local quirks in the sales tax rates (including tax holidays, etc.) that retailers or their service providers could use. It would certainly be in the states’ best interest to provide one. Perhaps a touch of federal regulation could help get it off the ground.

    Assuming this change is inevitable, there really should be no reason that it becomes a minefield for online retailers in this day and age of sophisticated cloud services. Very few small outlets manage their own payment processing anyway these days — the security issues alone are enough to deter all but the most obstinate.

  4. Thank you for linking the opinion. I don’t have an issue with it on the basis of the Commerce Clause, but I do want to go back and read the prior opinion that dealt with the Due Process issue. Stated differently, I don’t have a problem with saying imposing the tax doesn’t interfere with Interstate Commerce, but I have a real problem seeing out another state which a company has minimal contacts with can order the company to do anything. That is problematic.

    Ironically the real winner here is probably Amazon, because they have the ability to collect and report taxes anywhere in the country, so small retailers will have a very compelling reason to use their services.

    Unless they’ve changed their business model the loser would be DirecTV, which will now be subject to state and local taxes on their services. I wonder what other areas of commerce will be impacted.

    1. Oh yeah, the losers here aren’t just the taxpayers (who were theoretically supposed to be paying anyway), but the smaller internet retailers who may now have to set up processes for collecting sales tax in the 45 states that have one.

      1. Plus all the local jurisdictions, which have different rates. Also, Seattle has a tax on sugary drinks. Does that have to be collected?

        1. California taxes will be a nightmare. Every city and county has a different tax rate — from 7.5% to 10.25% plus additional sales tax on certain items. Some computer programmer or company is going to make bank creating the program to calculate the different rates based on residence city, county and state — and all online retailers are going to have to buy/lease it.

    2. How many small retailers actually process their own payments these days? Very few, I’d wager. PayPal, Visa, Mastercard, Ebay, and the other online payment processors and marketplace providers will offer the same services Amazon will.

      Not sure why you would single out DirecTV as a problem child. The parent company, AT&T already has to deal with a whole slew of differing state and local taxes on their mobile phone services, and they already have two different ways to deal with it.

      1) They add the taxes to the monthly bill, based on your place of residence.
      2) They include all the taxes in their advertised rates for prepaid phone plans from Cricket Wireless, a subsidiary of theirs.

      I imagine it won’t be difficult for them to include their DirectTV service into their existing corporate solution.

      1. Payment processing isn’t the same as determining the tax at each locality. But the companies you mention do have the ability and available funds to put something together–it would be work though.

        As to DirecTV, sure they can do either of those two things, but it’s an advantage they had over cable that is going away–no local taxes. So they lose a price advantage.

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