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and Newegg Inc., the court said the previous law of the land, known as the Quill decision, was flawed and had become outdated because of advances in technology and commerce.
Writing for the majority, Justice Anthony Kennedy said the physical presence requirement gave some online retailers an unfair advantage.
“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.
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.