Personal Finance

Here’s what that Supreme Court sales tax decision means for you

Key Points
  • The U.S. Supreme Court ruled that states can require internet retailers to collect sales taxes, even if the merchant doesn't have a physical presence there.
  • If you reside in a state with sales taxes, you were already required to report and pay 'use taxes' on your web-based purchases.
  • Alaska, Delaware, Montana, New Hampshire and Oregon have no state-level sales taxes.
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If you've been ducking sales taxes for your online purchases, it's game over.

The Supreme Court is about to make it easier for your state to collect its share.

In a 5-4 ruling in favor of South Dakota and against online retailer Wayfair, the court decided that states can require merchants to collect sales taxes for online purchases.

Online shoppers who reside in one of the 45 states that have a sales tax should have been reporting and remitting those levies to their state of residence.

SCOTUS internet tax decision levels the playing field, says former Office Depot CEO
SCOTUS internet tax decision levels the playing field, says former Office Depot CEO

If you haven't been doing this, you might get a nasty surprise at checkout if your state successfully pushes online merchants to collect those taxes.

"This is about improved enforcement of a tax that's already on the books," said Carl Davis, research director at the Institute on Taxation and Economic Policy.

"For years, shoppers have been able to evade these taxes by shopping with certain online retailers."

Here's what you can expect.

Use taxes

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The Supreme Court's decision overturns a 1992 ruling in Quill Corp. v. North Dakota, which found that states could not require retailers to collect sales taxes unless they had a physical presence in the same place where the buyer is located.

Major online retailers — namely Amazon — have fallen under that rule by building data centers and other facilities in multiple locations.

Amazon has been collecting sales taxes nationwide since April 1, 2017.

Shoppers pay either a sales tax or use tax when they make purchases.

If your state hasn't assessed you a sales tax for your online shopping, you should know you're probably on the hook for a use tax instead.

This levy applies to items purchased outside of your home state.

These are generally assessed at the same rate as a sales tax, but the burden of reporting and remittting the money owed falls on the consumer.

"It's important to keep in mind that as a consumer, you already owe taxes on those online sales," said Howard Gleckman, a senior fellow at the Tax Policy Center. "When you file your return, you also have to file a use tax report and pay taxes there — and nobody does it."

Simplified collection

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The Supreme Court's decision will likely encourage states to require merchants to collect sales taxes, which will allow those jurisdictions to rely less on consumer-reported use taxes.

"As a matter of convenience, assuming I want to pay the tax, I'd rather have it collected by the retailer than to keep all my receipts and fill out a form," said Gleckman.

"If you're a taxpayer who truly complies with the law, it makes your life easier, not harder," he said.

Compliance for sellers

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What remains to be seen is how states will interpret the court decision and whether they will apply a threshold that might exempt smaller merchants from having to report and collect sales taxes.

In South Dakota, for instance, online sellers that have sales in the state exceeding $100,000 or more than 200 transactions to residents in the state have to remit sales tax.

"A smaller seller that does business there is exempt, it's not as capable of handling the compliance burden," said John Buhl, a spokesman for the Tax Foundation.

It would be wise for smaller merchants to keep an eye on Congress and on their states to see what will happen next.

"The best thing for states to collect revenue fairly and efficiently is to set standards," Buhl said. "There is a chance to do that now."

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