Business & Tech

In Wayfair case, Supreme Court to let states collect Internet sales tax

Thursday’s ruling involves a dispute between the state of South Dakota and Boston-based Wayfair Inc., along with other two other online sellers, Overstock.com Inc. and Newegg Inc.
Jenny Kane/Associated Press/File 2018
Thursday’s ruling involves a dispute between the state of South Dakota and Boston-based Wayfair Inc., along with other two other online sellers, Overstock.com Inc. and Newegg Inc.

The US Supreme Court on Thursday opened the door for states to collect more sales taxes from Internet retailers, dealing a blow to Boston-based online seller Wayfair but potentially creating a revenue windfall for Massachusetts.

The ruling will allow states to collect sales tax on purchases their residents make from remote retailers, sweeping aside restrictions that date to the mail-order catalog era that limited tax collections only to vendors that had stores or some other physical presence in the state.

Ruling on a lawsuit South Dakota brought against Wayfair and two other online sellers, Overstock.com Inc. and Newegg Inc., the court said the previous law of the land, known as the Quill decision, was flawed and had become outdated because of advances in technology and commerce.

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Writing for the majority, Justice Anthony Kennedy said the physical presence requirement gave some online retailers an unfair advantage.

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“Helping respondents’ customers evade a lawful tax unfairly shifts an increased share of the taxes to those consumers who buy from competitors with a physical presence in the State. It is essential to public confidence in the tax system that the Court avoid creating inequitable exceptions.”

In Massachusetts, the timing of the top US court’s decision was propitious, raising the prospect of new tax receipts just days after a voter initiative to increase taxes on wealthy residents was struck down by the state’s own high court.

In a report released late last year, the Government Accountability Office said Massachusetts could collect anywhere from $169 million to $279 million in additional taxes if the limitations of the Quill decision were removed. The Retailers Association of Massachusetts, a longtime critic of Quill, estimates a bigger annual gain: at least $300 million. Nationwide, the GAO said state and local government were poised to collect as much as $13.4 billion a year more from remote vendors.

But it isn’t likely that money will suddenly flood state coffers. The Baker administration said it doesn’t expect the Wayfair decision will substantially affect current sales tax collections, nor does the state Department of Revenue anticipate taking immediate new actions to increase collections.

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Still, the governor welcomed the Supreme Court decision, noting that local retailers have had to charge sales tax while out of state companies that sell over the Internet do not.

“It’s a good day for those in the retailing space who, for many years, have been disadvantaged because of the two-tiered system that’s been in place,” Governor Charlie Baker told reporters.

Like many states, Massachusetts has adopted new measures to tax online sales: In 2017, the revenue department ruled that online retailers above a certain size will have to collect sales taxes from Massachusetts consumers if their apps or cookies exist on those customers’ computers and phones.

However, that regulation was challenged in a Virginia court by an out-of-state online electronics retailer, Crutchfield. Even so, Massachusetts officials say nearly 300 businesses have registered with the state so far as a result, and the regulation is expected to raise $30 million in the next fiscal year.

The decision was applauded by Democratic leaders on Beacon Hill who were still reeling from the rejection of the tax ballot on high earners, which could have generated some $2 billion a year in new revenue for the state. Senate President Harriette Chandler said the Wayfair ruling softens the blow, and House Speaker Robert DeLeo said he will consult with colleagues about the next steps the Legislature should take.

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Many people already pay taxes on online sales. For example, a Massachusetts resident buying a stool from Wayfair would pay sales tax because Wayfair has operations here. But an online retailer that sold the same stool to a resident in a state where it did not have a local presence would not have to collect sales tax.

Wayfair shrugged off the court loss. The Boston retailer, which is growing rapidly, said it doesn’t expect much of a financial hit, because it already collects and remits sales tax on about 80 percent of its orders in the United States, largely because it now has warehouses around the country. Shares in the online home goods retailer fell just 1.6 percent, to $114.28, on Thursday.

“The minute we have a physical presence, we start collecting sales tax [in a particular state],” said Enrique Colbert, Wayfair’s general counsel. “What we’ve been wanting from the beginning is just clarity on this.”

Experts expect smaller businesses that sell over the Internet will face a much harder time collecting and remitting the correct tax amount for thousands of state and local tax jurisdictions across the country. A number of local businesses rely heavily on online sales, either through their own websites or through digital marketplaces run by companies such as eBay, Amazon, and Etsy.

Chris McCabe, a Cambridge-based consultant to sellers who use Amazon’s marketplace, said many small vendors may go out of business or lay employees off because they don’t have the wherewithal to hire tax attorneys and accountants to handle the shift.

“It’s the tiny little independent businesses on the Amazon platform that I’m worried about,” said Steve DelBianco, chief executive of ecommerce trade group NetChoice. “The court has upset the apple cart for online businesses, and has scattered those apples all over every Main Street in America.”

But other Main Street brick-and-mortar businesses that have been competing against online retailers hailed the court ruling as a long overdue dose of fairness..

“We have happily paid the taxes that are required of us for a long time,” said Sara Hines, co-owner of the Eight Cousins bookstore in Falmouth. “It’s part of our business. We know what kind of impact it has on our community. It’s nice to know that’s going to be more equitably spread out among all retailers.”

The ruling was also a big relief to Jon Hurst, president of the Retailers Association of Massachusetts, which dropped its effort for a ballot question to reduce the state’s sales tax to 5 percent, from 6.25 percent, as part of a deal on Beacon Hill this week over separate measures on the minimum wage and paid leave.

Hurst was worried his members would be upset if the Wayfair decision went the other way. And many of his members still worry about competition in New Hampshire — which proudly does not charge a sales tax, online or otherwise. “The growing threat clearly was mobile and online commerce,” he said. “But we’re always going to have New Hampshire.”

New Hampshire, meanwhile, was not pleased. Governor John Sununu said the Supreme Court ruling would force retailers in his state to make expensive upgrades to their sales systems to collect taxes on online purchases made by out-of-state customers.

“I think it’s unconscionable that they would ask our businesses to become basically tax collectors for other states,” Sununu said, according to the Manchester Union Leader.

Material from Globe wire services was used in this report. Joshua Miller of the Globe staff contributed to this report. Jon Chesto can be reached at jon.chesto@globe.com. Follow him on Twitter @jonchesto.