The Supreme Court on Thursday narrowly sided with South Dakota in a case that will have massive implications for the retail industry, online shoppers and state governments. Research done by Barclays indicates that Tennessee is one of five states in the nation positioned to benefit most from Thursday’s ruling.
By a 5-4 decision, the court ruled that states have the right to collect sales taxes from retailers on purchases made online even if the businesses don’t have a brick-and-mortar presence in the state where the purchase is made. The decision in the case – South Dakota v. Wayfair, 17-494 – marks the reversal of two previous Supreme Court rulings made decades ago that stated state governments could not collect tax purchases made through the mail if the retailer did not have a physical presence in the state.
Justice Anthony Kennedy wrote an opinion joined by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito and Neil Gorsuch that the rise of e-commerce and the competitive advantage enjoyed by online retailers necessitated a change of direction by the nation’s high court.
“Each year the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the States,” Kennedy wrote.
According to one federal report, this decision could add $13 billion annually to state tax coffers. Due to a sales tax rate of 9.5 cents per dollar, Tennessee has been singled out along with Alabama, Louisiana, Oklahoma and South Dakota as the five states expected to benefit most from online sales tax collection. When lawyers for South Dakota argued their case before the Supreme Court, they claimed the state was losing out on $50 million per year in revenue.
Tennessee Senator Bob Corker was among those who applauded the court’s decision.
“I think most Tennesseans would agree that we are fortunate not to have a state income tax, and to help ensure that remains the case, it is important our sales tax system works,” Corker said in a statement. “Today’s ruling is a win for states’ rights and gives states like ours the ability to enforce existing state tax laws. It also levels the playing field between local brick-and-mortar businesses that pay property taxes and hire our local citizenry and out-of-state online retailers paying no sales tax.”
Before Thursday’s decision, online retailers who did not charge sales tax to Tennessee residents had a distinct advantage over retailers with a brick-and-mortar locations inside the state because they could essentially sell their goods at a 9.5 percent discount.
Tennessee law already required individuals who bought items online or through the mail to keep a record of such purchases and pay the sales tax directly to the state, but the law was difficult to enforce due to the sheer volume of online purchases in recent years.
Congressman Phil Roe alluded to that fact during his visit to the News & Neighbor last week, and he applauded Gov. Bill Haslam for pushing Amazon to start collecting state sales tax in 2014 when the online retail giant started building warehouses inside the state.
“Amazon does collect here in the state, and quite frankly, you owe those taxes now if you purchase something from another state,” he said. “You’re just not paying your taxes. It’s the law now.”
While large retailers such as Target, Walmart and Best Buy expect the court’s decision to level the playing field for them, the jury is still out on what the impact will be on small business. Justice John Roberts, who dissented along with Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan, expressed concerns that the decision would make it harder for entrepreneurs to break into the retail business.
“The burden will fall disproportionately on small businesses,” Roberts wrote. “The court’s decision today will surely have the effect of dampening opportunities for commerce in a broad range of new markets.”
Prior to the ruling, however, Roe said the headwind local retailers have been facing from online competition required some relief, and he used Mahoney’s Outfitters as a prime example.
“If I go camping, I buy everything I can from Dan Mahoney,” Roe said. “He’s at a disadvantage, a huge disadvantage.”