The Supreme Court handed states a big victory today, ruling that the Internet sales could be subject to sales taxes charged by the state where the customer resides regardless of whether or not the seller has a physical presence in the state in question:

WASHINGTON — Internet retailers can be required to collect sales taxes in states where they have no physical presence, the Supreme Court ruled on Thursday.

Brick-and-mortar businesses have long complained that they are disadvantaged by having to charge sales taxes while many of their online competitors do not. States have said that they are missing out on tens of billions of dollars in annual revenue under a 1992 Supreme Court ruling that helped spur the rise of internet shopping.

On Thursday, the court overruled that ruling, Quill Corporation v. North Dakota, which had said that the Constitution bars states from requiring businesses to collect sales taxes unless they have a substantial connection to the state.

Shares in Amazon were down just 1 percent in morning trading after the ruling, at $1,731.59. But other e-commerce companies suffered far tougher blows: Shares in Etsy, the marketplace for artisanal crafts, fell 4.5 percent, to $42.21, while those in Wayfair, a popular home goods seller, were down 3.2 percent, at $112.42.

Writing for the majority in the 5-to-4 ruling, Justice Anthony M. Kennedy said the Quill decision had distorted the nation’s economy and had caused states to lose annual tax revenues between $8 billion and $33 billion.

“Quill puts both local businesses and many interstate businesses with physical presence at a competitive disadvantage relative to remote sellers,” he wrote. “Remote sellers can avoid the regulatory burdens of tax collection and can offer de facto lower prices caused by the widespread failure of consumers to pay the tax on their own.”

Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel A. Alito Jr. and Neil M. Gorsuch joined the majority opinion.

In dissent, Chief Justice John G. Roberts Jr. agreed that the court’s rulings in this area had been “wrongly decided.” But he said there were insufficient reasons to overrule the precedents and that Congress should have been left to address the matter.

“E-commerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical-presence rule,” the chief justice wrote. “Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress.”

Justices Stephen G. Breyer, Sonia Sotomayor and Elena Kagan joined the dissent.

More from The Washington Post:

A divided Supreme Court ruled Thursday that states may require online retailers to collect billions of dollars of sales tax revenue owed to them.

The decision was 5 to 4.

More than 40 states and the Trump administration asked the Supreme Court to overturn its 1992 decision in Quill v. North Dakota that restricts states from collecting sales tax from retailers without a physical presence in those states. They said a decision in a case involving mail-order catalogues is obsolete in an era of e-commerce.

Justice Anthony M. Kennedy, who wrote Thursday’s majority decision, had earlier called for the court to reconsider the decision.

Kennedy wrote that dramatic technological changes had made the court’s previous ruling obsolete, and that it unfairly disadvantaged traditional brick and mortar stores.

“A virtual showroom can show far more inventory, in far more detail, and with greater opportunities for consumer and seller interaction than might be possible for local stores,” Kennedy wrote.

“Yet the continuous and pervasive virtual presence of retailers today is, under Quill simply irrelevant. This court should not maintain a rule that ignores these substantial virtual connections to the state.”

He was joined by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel A. Alito Jr. and Neil M. Gorsuch.

Chief Justice John G. Roberts Jr. wrote the dissent. He said the court should not be doing the work of Congress, even if its earlier precedents are open to question.

“E-commerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical-presence rule,” he wrote.

“Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress. The court should not act on this important question of current economic policy, solely to expiate a mistake it made over 50 years ago.”

South Dakota brought the challenge. It passed a law requiring retailers with more than $100,000 in annual sales or 200 transactions in the state to pay a 4.5 percent tax. Although technically consumers are required to pay sales tax on all purchases, it is practically impossible to collect without the retailer applying it at the point of sale.

A Government Accountability Office audit said states missed out on about $13.7 billion in tax revenue in 2017.

Retailers said overturning Quill would allow states to go far beyond the model legislation that South Dakota passed, requiring collection by retailers with a single sale in a state or perhaps trying to force the companies to comply retroactively.

Congress, the retailers argued, could implement national rules rather than open up the companies to having to deal with the specific requirements of what they say are 12,000 taxing jurisdictions nationwide.

Lyle Denniston comments:

Justice Anthony M. Kennedy, who wrote the majority ruling, admitted that the Court itself was wrong in maintaining – for 51 years – the constitutional rule that a state government may not collect sales tax from an out-of-state retailer unless that company had a “physical presence” in the state – a store, a staff of employees, or a warehouse, for example.

Kennedy said that the part of the Constitution that controls business activity in America – the Commerce Clause in Article I – did not give the courts the power “to create market distortions.”

At an economically practical level, the decision means that Internet sellers lose a competitive advantage they had over traditional retailers to sell at lower prices, and they now lose the right to claim that their sales are free of sales tax.  That is a marketing tool, the Court noted, used by one of the big firms involved – Wayfair, Inc., a major seller of home goods.  Also involved were another large seller of home goods and jewelry, Overstock, Inc., and Newegg, Inc., a major seller of consumer electronics.

Although Congress for years has been hearing the complaints of state governments and of an increasing challenged retail store industry about the Court’s protection of out-of-state sellers, the lawmakers on Capitol Hill have never been able to forge an answer.

Four members of the Court, dissenting in an opinion written by Chief Justice John G. Roberts, Jr., argued in vain that the problem should have been left to Congress to solve.  The change made by the majority, the dissenters said, has “the potential to disrupt the development of such a critical segment of the economy.”  (The dissenters did agree that the half-century old precedent struck down Monday was decided wrongly, but they said any remedy should have been up to Congress.”)

The most significant thing about this decision is that it effectively overrules not one but two previous Supreme Court cases that formed the basis of the so-called “physical presence” rule that the Court has rejected today. The first such decision was handed down in 1967 in National Bellas Haas v. Department of Revenue. In that case, the Court ruled that a mail-order catalog business was not required to collect sales tax on behalf of states in which it does not have a physical presence. Twenty-six years later, the Court ruled in 1993 in Quill Corp. v. South Dakota in a manner that somewhat overruled the central holding of Bellas Haas but did not completely throw the precedent out. Specifically, the Quill ruling still established that the Commerce Clause prevented states from requiring businesses without an in-state physical presence from collecting sales taxes. Even though both Bellas Haas and Quill pre-date the vast expansion of the Internet that began with the creation of the World Wide Web and the rise of e-commerce sites or smaller businesses who used e-commerce portals to sell products to people living in other states, their central holding still formed the basis for how sales over the Internet were treated for sales tax purposes. Basically, of course, the rule has been that online merchants, regardless of their size, are not required to collect sales tax in jurisdictions that they do not have a physical presence in. This has led to much consternation on the part of states who see themselves as being deprived of revenue as more and more business shifted online and on the part of bricks-and-mortar retailers who assert that the exemption was giving online retailers an unfair advantage over them in a marketplace that was already becoming difficult for them.

In it’s ruling today, the Court explicitly rejected the “physical presence” rule that had been established in Bellas Haas and Quill. Specifically, the majority ruled that, given the extent to which the Internet’s “prevalence and power have changed the dynamics of the national economy,” this rule no longer made any sense. Indeed, this appears to be a conclusion that both the majority and the dissent agreed upon, with the dissent arguing mainly that this is an area where Congress should act rather than the Courts given the nationwide implications for the ruling. As a matter of law, though, it seems clear that the majority has the better argument here. The “physical presence” rule that was established in Bellas Haas and Quill may have made sense in an era where people shopped via catlogs, but it doesn’t make sense in the modern era when more and more commerce is being done online, and where the major internet retailers are beyond question no longer in the mind of position where they were in the 1990s when the still burgeoning world of e-commerce was still in its infancy and arguably needed to be protected from having to figure out how to comply with local and state sales tax rules.

In its decision in the Quill case, and in its decision today, the Supreme Court did note that the exemption could be ended or modified by Congressional legislation. Toward that end, there have been several efforts in the past several years to pass legislation that would have mandated the collection of sales taxes by out of state businesses, although those efforts have not succeeded in any measure passing either chamber of Congress. In order to address the objections of smaller retailers who lack the resources of large businesses such as Amazon, those bills have included provisions that provide that the obligation to collect sales taxes would only kick in when a business had made sales above a certain dollar amount to a specific state. Other proposals included requirements that the states and localities that impose sales taxes to work together to provide a method that could be used nationwide to assist these smaller retailers in calculating, collecting, and remitting sales taxes to the proper jurisdictions. Proposals such as this would protect small businesses that have only limited sales in a state in which they have no physical presence from the financial burden of having to account for the sales tax laws of states and localities that they have no connection to beyond shipping something to a customer who happens to be located there.

In theory, of course, Congress could effectively reverse the Court’s ruling here thanks to its authority under the Commerce Clause and reinstate the “physical presence” rule established by Bellas Haas and Quill, but it seems unlikely that will happen for several reasons. For one thing, as noted above previous efforts by Congress to act in this area have barely made it out of committee in either chamber never mind to a final floor vote. For another, the lobbying positions of many of the major players in this debate have changed significantly in recent years. In the past, companies such as Amazon have argued along with smaller retailers that they should be exempt from sales taxes in states where they don’t do business. More recently, though, these larger companies have reversed their decisions and now seem to be on the same side as the states in arguing in favor of allowing states to collect sales tax from out-of-state retailers. This means that an effort to get a measure reinstating the Quill rule through Congress would most likely fail.

A more likely outcome in Congress could be a law that would contain some of the protections for smaller retailers that I mentioned above such as an annual sales revenue limit or the establishment of nationwide means for smaller businesses to easily calculate, collect, and remit sales tax revenues to all the jurisdictions that have such laws. At the same time, it’s likely that this decision will lead larger companies to bring to the market back office services that could accomplish the same thing. Proposals such as this seem like a reasonable accommodation to both the interests of the states that collect sales taxes and small businesses that may not be able to track the sales tax rates in all the jurisdictions they may ship to at one time or another.

For most people who primarily do business with larger online retailers, of course, the impact of decisions will be limited at best. Thanks largely to the fact that they have expanded their locations nationwide in an effort to increase their ability to ship merchandise quickly and efficiently, online retailers such as Amazon have been required to collect sales taxes in an increasing number of jurisdictions. This is because, even under the Quill “physical presence” rule, all that was required was for a business to have a physical presence of any kind in a given state and they would become legally obligated to collect sales taxes in that jurisdictions. For example, if there is an Amazon distribution center in your state and your state is one of the 46 that charges sales taxes, then you’ve already been paying sales taxes on your online purchases on these sites. All this decision means for these larger companies is that they will now be required to also charge sales tax in jurisdictions where they don’t have a presence yet. Given their size, though, the relative cost of this will be minimal at best.

All of this will likely take some time to play itself out. Many states and localities that do charges sales tax, for example, will probably find it necessary to make adjustments in their laws to allow for the taxation of online and other out-of-state sales as well as the means to track such transactions in some manner. For some states where the legislature only meets once a year, this will mean that legislative action may not happen until 2019. Other states will probably act more quickly, especially given the fact that this will mean at least somewhat of an increase in tax revenues that they will want to take advantage of the increased revenue as soon as possible. Congressional action of the kind I described above is also unlikely in the short term given the relatively short amount of time between now and the end of September when they will adjourn for the midterm campaign. It’s possible that we might see some effort at in this regard during the post-election lame-duck session but more likely that any such action won’t happen until the new Congress takes office next January.

In any case, the days of the sales tax-free Internet are over.

Here’s the opinion:

South Dakota v. Wayfair, Inc. Et Al Opinion by Doug Mataconis on Scribd