That thunderous noise Thursday, right around 11 a.m., was the sound of champagne corks popping in unison at statehouses across the country. In a widely anticipated ruling, the US Supreme Court said that states can force online sellers to collect sales tax, even when the vendors lack a physical presence in the state. The ruling clears the way for states, including Massachusetts, to collect an estimated $13 billion or more in extra taxes every year.
It should also help brick-and-mortar retailers, who have suffered for years from uneven competition with online stores that don’t have to collect the state’s 6.25 percent sales tax. The big losers in the ruling are not behemoth companies like Amazon, which already collects sales tax, but smaller online sites like Boston-based Wayfair — one of the companies that was at the center of the litigation, which was brought by the state of South Dakota.
In theory, customers who shopped on those sites were supposed to pay taxes themselves, through the state’s use tax, but few did. With a wink and nod, some vendors made tax-free shopping a theme in their marketing, a brazen strategy that raised the court’s ire. Wayfair, which sells home goods, came in for a lashing from Justice Anthony Kennedy, who wrote the majority opinion. Pointing to the company’s ads, he wrote: “What Wayfair ignores in its subtle offer to assist in tax evasion is that creating a dream home assumes solvent state and local governments.”
Those governments are now expected to swiftly start forcing online vendors to collect taxes. The Department of Revenue downplayed Thursday the potential impact on state revenues, but Eileen McAnneny, the president of the Massachusetts Taxpayers Foundation, said the additional tax collections now could reach “potentially in the hundreds of millions.” The ruling should also eliminate the need for the kind of workarounds that Massachusetts regulators have recently devised to snare more online vendors, such as arguing that Internet “cookies” constituted a physical presence, a policy Kennedy cited as he dispensed with the physical-presence test.
“Statutes of this sort are likely to embroil courts in technical and arbitrary disputes about what counts as a physical presence,” he wrote. Massachusetts can take a little slice of the credit for helping to show the court how unworkable the old test, devised in the era of printed catalogs, was becoming in practice in the digital world.
So what’s next? The prospect of a sudden windfall comes as legislators contend with the Supreme Judicial Court’s decision earlier this week to remove the so-called millionaires tax from the ballot. New collections from the sales tax won’t come anywhere close to the $2 billion the income tax surcharge on top earners was expected to generate, but they will help. The court’s decision, state Senate president Harriette Chandler said in a tweet, “will bring in needed revenue to cover a portion of the infrastructure and education priorities that the millionaire’s tax was targeted for.” Just a few days after the SJC left transit and education advocates crestfallen, the outlook has brightened.