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Supreme Court Clears Way for Local Governments to Tax Internet Sales

On Behalf of | Jun 21, 2018 | Firm News

Written by:  Jack McKenna

Today the Supreme Court of the United States opened up a new and potentially significant revenue stream to municipalities in Alaska.

In South Dakota v. Wayfair Inc., the Court ruled that companies no longer need to have a physical presence in a state in order for that state to require the company to collect sales taxes.  The decision overruled the Court’s previous opinions in National Bellas Hess, Inc. v. Department of Revenue of Illinois and Quill Corp. v. North Dakota.  In those decisions, announced before the dot-com boom established the internet as the prime method for many consumers to purchase goods, the Court had held that a state could only require out-of-state retailers to collect sales taxes if the company had a physical presence in the state.  When Quill was decided, physical stores were by and large the main choice for consumers; mail order retailers of the day accounted for a smaller percentage of overall sales.  However, that has obviously changed since Quill established the “physical presence rule” in 1992.  By 2015, Amazon had eclipsed Wal-Mart as the world’s largest retailer.  And most holiday purchases are now made online.  This shift from shopping locally to on-line has dried up a significant portion of state and local governments’ revenue from sales taxes.  Estimates for the decrease in revenue to state and local governments range between $8 billion and $33 billion.

These changes in Americans’ shopping habits have extended to Alaska and impacted the budgets of local municipalities and boroughs.  While the State of Alaska does not collect sales taxes, many boroughs and municipalities rely upon sales taxes as a source of funding.  The decision announced today has the potential to revive those revenue streams.

However, some potential challenges remain.  The Court’s decision today did not address whether the particular law at issue in South Dakota complied with the United States Constitution’s Commerce Clause.  Per the Supreme Court’s rulings related to that clause, states may not discriminate against interstate commerce and, instead, must treat local and out-of-state retailers alike.  However, Justice Kennedy’s opinion did provide some guidance on how to comply with the Court’s caselaw in that area.

With the “physical presence rule” from Bellas Hess and Quill now consigned to history alongside the former prominence of Blockbuster and the Sears catalog, state and local governments will now be able to collect taxes on goods purchased online.  Municipalities and boroughs in Alaska should review their Codes in order to determine whether their sales taxes can now be constitutionally applied to sales made by out-of-state retailers to consumers in Alaska.