WASHINGTON, June 21 (Reuters) - States have broad authority to force online retailers to collect potentially billions of dollars worth of sales taxes, the U.S. Supreme Court ruled on Thursday, siding against e-commerce companies in their high-profile fight with South Dakota.
The justices, in a 5-4 ruling against Wayfair Inc, Overstock.com Inc and Newegg Inc, overturned a 1992 Supreme Court precedent that had barred states from requiring businesses with no "physical presence" in that state, like out-of-state online retailers, to collect sales taxes.
The ruling opens the door to a new revenue stream to fill state coffers - up to $13 billion annually, according to a federal report - while imperiling a competitive advantage that e-commerce companies had over brick-and-mortar rivals that already must collect sales tax.
Shares of online retailers fell sharply following the ruling, with Wayfair down 3.8 percent, Overstock off 2.1 percent and Etsy Inc shares off 4.4 percent. Amazon.com Inc shares fell as much as 1.9 percent before paring losses. Amazon was among the biggest drags on the benchmark S&P 500 stock index.
The court, in a ruling authored by conservative Justice Anthony Kennedy, revived a 2016 South Dakota law that required larger out-of-state e-commerce companies to collect sales tax, a mandate that the online retailers fought in court.
"Rejecting the physical presence rule is necessary to ensure that artificial competitive advantages are not created by this court's precedents," Kennedy said.
The win was welcomed by groups representing brick-and-mortar retailers and decried by e-commerce advocates.
The ruling puts an end to a legal regime that "distorts free markets and puts local brick and mortar stores at a competitive disadvantage with their online-only counterparts," said Deborah White, general counsel of the Retail Industry Leaders' Association.
Small online businesses will be the hardest hit, said Chris Cox, a lawyer for e-commerce industry group NetChoice.
"Consumers will quickly feel the negative effects as those businesses dry up or are forced into the arms of Internet giants," he added.
South Dakota was backed by President Donald Trump's administration in the case. The law could yet face legal challenges on other grounds, Kennedy noted.
RELATED: The most significant Trump reversals of Obama orders in 2017
The most significant Trump reversals of Obama orders in 2017
The most significant Trump reversals of Obama orders in 2017
DEFERRED ACTION FOR CHILDHOOD ARRIVALS (DACA)
Signed in 2012, Obama’s executive order offering legal protections from deportation to children brought into the country by undocumented immigrant parents offered a legal respite for nearly 800,000 people. While it was not a permanent solution, many Republicans in Congress sided with Democrats in the view that children protected under the Deferred Action for Childhood Arrivals program should ultimately be granted U.S. citizenship. But on Sept. 5, 2017, President Trump put that possibility in doubt. “Make no mistake, we are going to put the interest of AMERICAN CITIZENS FIRST!” Trump tweeted ahead of an announcement by his attorney general that he was rescinding Obama’s action. The matter now rests with Congress.
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TRANSFER OF SURPLUS MILITARY EQUIPMENT TO LOCAL POLICE
In 2015, in the wake of what some viewed as the outsize police response to the unrest in Ferguson, Mo., Obama issued an order banning the sale of surplus military equipment such as grenade launchers and armored vehicles to local police forces. On Aug. 28, 2017, Attorney General Jeff Sessions announced that Trump was scrapping the restriction “to make it easier to protect yourselves and your communities.”
(Photo by Samuel Corum/Anadolu Agency/Getty Images)
NORMALIZING RELATIONS WITH CUBA
Denouncing the Obama administration’s 2014 decision to normalize diplomatic relations with Cuba, President Trump announced on June 16, 2017, that he was putting travel and trade restrictions with the island nation back in place. “The previous administration’s easing of restrictions on travel and trade does not help the Cuban people — they only enrich the Cuban regime,” Trump said in a Florida speech.
(A vintage car drives past the U.S. Embassy in Havana, Cuba, June 19, 2017. REUTERS/Alexandre Meneghini)
THE PARIS CLIMATE AGREEMENT
Trump has said he believes that climate change is a hoax perpetrated by the Chinese. His June 1, 2017, decision to walk away from the Paris climate agreement signed by his predecessor ultimately left the United States isolated as the only country in the world not onboard.
(REUTERS/Jacky Naegelen/File Photo)
OFFSHORE AND ARCTIC OIL DRILLING
Making good on the long-held Republican slogan “Drill, baby, drill,” Trump overturned a 2016 Obama executive order banning oil drilling in parts of the Atlantic Ocean and the Arctic.
“This is a great day for American workers and families,” Trump said at a signing ceremony on April 28, 2017. “And today we’re unleashing American energy and clearing the way for thousands and thousands of high-paying American energy jobs.”
(Susanne Miller/US Fish and Wildlife Service/Handout via Reuters)
Obama’s rules that guaranteed equal access to the internet — aka net neutrality — were enshrined in 2015 with a vote from the Federal Communications Commission. But new FCC commissioners are appointed by whichever president is serving, and when Trump took office he installed new leadership, which voted on Dec. 14 to scrap the policy, opening up the internet to what critics fear will result in a tiered system of information and entertainment.
REUTERS/ Kyle Grillot
THE CLEAN WATER RULE
On Feb. 28, 2017, President Trump began his assault on Obama’s executive order that expanded federal oversight of pollution in the nation’s rivers, streams and lakes. Trump’s first step was to order the EPA to “review and reconsider” the restrictions. Then, in June, the administration officially rolled back the environmental protections for over half of the nation’s tributaries.
(Yellow mine waste water is seen at the entrance to the Gold King Mine in San Juan County, Colorado, in this picture released by the Environmental Protection Agency (EPA) taken August 5, 2015. REUTERS/EPA/Handout/File Photo)
CAPS ON GREENHOUSE GAS EMISSIONS AT POWER PLANTS
Keeping a campaign promise to the coal industry, Trump signed an executive order on March 28, 2017, intended to begin dismantling Obama’s Clean Power Plan, which required power plants to reduce carbon emissions. Trump’s new “Energy Independence” order also reversed a ban on coal leasing on federal lands and loosened restrictions on methane emissions. Several states immediately filed a lawsuit against the administration, claiming the move endangered the health of citizens.
(The coal-fired Castle Gate Power Plant is pictured outside Helper, Utah November 27, 2012. REUTERS/George Frey)
SCOPE OF NATIONAL MONUMENTS
Applauded by industry and decried by environmentalists, Trump signed an executive order on April 26, 2017, that swept away Obama’s use of the 1906 Antiquities Act to protect federal lands from oil drilling, mining and other development. “Today we’re putting the states back in charge,” he said at the signing. In December, the administration announced it would reduce the size of the Obama-created Bears Ears National Monument by 85 percent, and the Bill Clinton-designated Grand Staircase-Escalante National Monument by 50 percent.
(The moon glows over Indian Creek in the northern portion of Bears Ears National Monument, Utah, U.S., October 29, 2017. REUTERS/Andrew Cullen)
BATHROOM PROTECTIONS FOR TRANSGENDER STUDENTS
One month into his term, Trump rescinded an Obama directive that allowed students to use school bathrooms that matched their self-identified gender. Trump’s rationale for the reversal was that states, rather than the federal government, should decide how to handle the question.
American Federation of Teachers President Randi Weingarten decried the move, telling the Associated Press that it “tells trans kids that it’s OK with the Trump administration and the Department of Education for them to be abused and harassed at school for being trans.”
(Photo via Smith Collection/Gado/Getty Images)
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BACK TO SLIDE
The ruling is likely to lead other states to try to collect sales tax on purchases from out-of-state online businesses more aggressively. It also likely will lead to many consumers paying more at the online checkout. Forty-five of the 50 states impose sales taxes.
Most states would need to pass legislation before seeking to collect the additional taxes, although some have already enacted laws or regulations similar to South Dakota's.
South Dakota has estimated that it could take in up to $50 million a year in additional revenue with these taxes being collected.
States like South Dakota that depend heavily on sales taxes for their revenue are likely to benefit most, with a predicted maximum revenue increase of around 3 percent, according to a Barclays research note.
The states that are likely to see the biggest percentage increase in revenue are Louisiana, Tennessee, South Dakota, Oklahoma and Alabama, according to the Barclays research.
Kennedy wrote that the 1992 precedent that affirmed that a physical presence is required - a case called Quill v. North Dakota - was "flawed on its own terms" and was especially problematic due to the rise of internet retail.
In the digital era, the costs of complying with different tax regimes "are largely unrelated to whether a company happens to have a physical presence in a state," Kennedy wrote.
The ruling comes against a backdrop of Trump's criticism of Amazon, the leading player in online retail, on the issue of taxes and other matters.
Amazon, which was not involved in the Supreme Court case, collects sales taxes on direct purchases on its site but does not typically collect taxes for merchandise sold on its platform by third-party vendors, representing about half of total sales.
(Reporting by Lawrence Hurley; Editing by Will Dunham)