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Supreme Court sales tax ruling will hit your online shopping bill

The decision should wipe away a big advantage internet retailers have over brick-and-mortar stores.

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The US Supreme Court decided that states can require online retailers to collect sales taxes.

Jim Watson / AFP/Getty Images

You'll soon be paying more in taxes for online purchases.

The US Supreme Court on Thursday gave states the ability to require online and out-of-state retailers to collect and send them state sales taxes. The 5-4 decision overturns a 1992 Supreme Court ruling that prevented the practice.

Brick-and-mortar retailers in states are required to collect taxes on a state's behalf. Until now, that requirement didn't apply to online retailers with no physical presence, such as an office or warehouse, in a given state. Instead, consumers were responsible for sending states the necessary taxes -- something that most people never do.

That's resulted in states losing millions of dollars in sales taxes every year, and a decades-long tax advantage for online retailers over their brick-and-mortar peers. Those issues have only been exacerbated over the years as more consumers spend money online, resulting in a long list of bankruptcies and store closures at traditional retailers.

The decision weighed on shares of major internet retailers, including AmazoneBay and Wayfair, all dropped following the decision. Shares of online crafts market Etsy also fell.

Thursday's decision reflects the court's awareness of changes in consumer behaviors, which have allowed many to skip local taxes by shopping online.

Still, e-commerce remains a relatively young industry. It's hard to say whether the new decision will weaken its continued growth and harm smaller online businesses.

Justice Anthony Kennedy referenced the industry's swift rise in the majority opinion, noting that mail-order US sales in 1992 were $180 billion, less than half of e-commerce sales today.

"Last year, e-commerce retail sales alone were estimated at $453.5 billion," he wrote. "Combined with traditional remote sellers, the total exceeds half a trillion dollars."

Moody's analyst Charlie O'Shea said Amazon's direct sales won't be affected by the new decision, since the world's largest online retailer already collects sales tax in every state that has one. However, he added, smaller retailers that sell their goods through Amazon could face a significant impact, since a chunk of their sales haven't been taxed.

Whether higher taxes on those goods will hurt Amazon's overall revenue "remains to be seen," O'Shea said, though he noted that Amazon has thrived as a business despite needing to collect more in sales tax as it expanded to new states. 

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Amazon didn't immediately respond to a request for comment.

eBay CEO Devin Wenig tweeted Thursday that the decision was clearly aimed a larger businesses and called on Congress to create exceptions for small businesses, like the many that use his company's site.

As South Dakota goes

In 2016, South Dakota enacted a law requiring out-of-state sellers to collect and send sales taxes, after years of grumbling from traditional retailers. The law was limited to companies delivering more than $100,000 of goods or services to the state, or completing 200 or more transactions. That minimum was likely meant to avoid an undue burden on small mom-and-pop retailers who sell their goods on eBay, Amazon or other online marketplaces.

South Dakota then filed a lawsuit against three large online retailers -- Wayfair, Newegg and Overstock.com -- to declare the new law valid. The suit eventually found its way to the Supreme Court. The state argued it was losing between $48 million and $58 million a year due to the tax situation.

Thursday's decision overturned a 1992 ruling that stated a physical presence was necessary to require retailers to collect and send sales taxes to a state. The court called the prior ruling "unsound and incorrect," since, in effect, it created tax shelters for retailers that limit their physical presence. The new ruling will open the door to more states passing laws similar to South Dakota's.

In a dissenting option, Chief Justice John Roberts said that a significant change that could disrupt the development of e-commerce should be taken up by Congress, not the court. He added the change would disproportionately harm small businesses that will need to work through new sets of state tax codes.

The National Retail Federation, a trade group that includes many of the largest brick-and-mortar US retailers, called Thursday's decision "a major victory" that was two decades in the making.

"This ruling clears the way for a fair and level playing field where all retailers compete under the same sales tax rules whether they sell merchandise online, in-store or both," Matthew Shay, federation president and CEO, said in a statement.

Wayfair, which already collects taxes on about 80 percent of its US orders, said Thursday it has supported a legislative decision to change the current tax situation. It added that it doesn't expect the ruling to noticeably impact its business.

"While we believe the Court was not the ideal venue for creating this level playing field," the company said, "we expect that today's decision will bring clarity and certainty to this issue."

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