Online Sales Tax Case Rejected by the U.S. Supreme Court, Cost of Online Purchases May Go Up

Posted on December 22, 2016

When you purchase something at a local brick and mortar store, you are required to pay sales tax on that item. Although most people are not aware of this, if you purchase an item online from an out of state retailer, you are still supposed to pay sales tax to the state in which you live for the item that you purchased.

However, this requirement has been widely ignored insofar as purchasers will not separately calculate sales tax and write a check to the state in which they live. But wait, you say!? Aren’t online purchases sales tax free? Well, the answer is no.

A ruling by the United States Supreme Court in 1992 states that retailers must have a physical presence in a state before officials can make that retailer collect sales tax. Sales tax on purchases has always been due but the question remained as to how states could collect that sales tax.

In 2010, Colorado passed a law requiring online retailers to notify customers to pay sales tax and to report those purchases to the state. In this fashion, Colorado sidestepped the rule that retailers must have a physical presence in a state before officials can make them collect sales tax. On Monday, December 12, 2016, the U.S. Supreme Court refused to hear a challenge to the Colorado law, effectively leaving in place the requirement that online retailers must notify its customers to pay sales tax on their purchases and to notify the state of that purchase.

Sales tax accounts for about one-third of revenue in many states and is even more important to states without income tax laws, such as Texas and Florida. Colorado alone estimates that it has lost as much as $172.7 million per year in sales tax to online sales. Further, online sales are increasing by at least 15% every year. Three other states have passed laws similar to Colorado’s law and have been watching the Colorado case pending before the Supreme Court. So, for now, Colorado has won this sales tax battle. However, because other states will likely enact similar legislation, Congress will likely weigh in on this issue.

Ultimately, this issue may end up again before the Supreme Court. What do you think?

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