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South Dakota e-commerce sale tax fight reaches U.S. Supreme Court

Stock MarketsApr 16, 2018 10:33AM ET
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© Reuters. FILE PHOTO: The South Dakota state capitol building in Pierre

By Lawrence Hurley

WASHINGTON (Reuters) - A high-stakes showdown at the U.S. Supreme Court on Tuesday will determine whether states can force out-of-state online retailers to collect sales taxes in a fight between South Dakota and e-commerce businesses.

South Dakota is asking the nine justices to overturn a 1992 Supreme Court precedent that states cannot require retailers to collect state sales taxes on purchases unless the businesses have a "physical presence" in the state.

The state, appealing a lower court decision that favored Wayfair Inc, Overstock.com (NASDAQ:OSTK) Inc and Newegg Inc, is being supported by President Donald Trump's administration.

A ruling favoring South Dakota could help small brick-and-mortar retailers compete with online rivals while funneling up to $18 billion into the coffers of the affected states, according to a 2017 federal report.

The justices will hear arguments in the case on Tuesday against a backdrop of Trump's harsh criticism of Amazon.com Inc (NASDAQ:AMZN), the dominant player in online retail, on the issue of taxes and other matters. Trump has assailed Amazon CEO Jeff Bezos, who owns the Washington Post, a newspaper that the Republican president also has disparaged.

Amazon, which is not involved in the Supreme Court case, collects sales taxes on direct purchases on its site but does not collect taxes for items sold on its platform by third-party venders, constituting around half of total sales.

South Dakota depends more than most states on sales taxes because it is one of nine that do not have a state income tax. South Dakota projects its revenue losses because of online sales that do not collect state taxes at around $50 million annually, while its opponents in the case estimate it as less than half that figure.

Major retailers that have brick-and-mortar stores, and therefore already collect taxes, are represented by industry groups that back South Dakota. The National Retail Federation, which supports the state, has a membership list that includes Walmart (NYSE:WMT) Inc and Target Corp (NYSE:TGT), as well as Amazon.

Stephanie Martz, the federation's general counsel, said in an interview the case gives the Supreme Court a chance to adapt the law to new circumstances prompted by the rise of internet shopping.

"Things have changed a lot since 1992. The entire nature of interstate commerce has changed," Martz said.

E-commerce companies supporting Wayfair, Overstock and Newegg include two that provide online platforms for individuals to sell online: eBay Inc (NASDAQ:EBAY) and Etsy Inc.

"Win or lose at the Supreme Court, we will continue to advocate for a legislative solution and a level playing field where all retailers collect and remit sales tax on the same basis," Wayfair spokeswoman Jane Carpenter said in a statement.

Brian Bieron, eBay's senior director of government relations, said in an interview the 1992 precedent "provides the many small businesses that use the internet with a very clear and simple and stable legal environment in which to grow their business."

Overturning the ruling while not replacing it with a new national framework "is really going to be a negative move in terms of e-commerce," Bieron added.

A 2016 South Dakota law requires out-of-state online retailers to collect sales tax if they clear $100,000 in sales or 200 separate transactions. State legislators knew the measure was unlawful under the 1992 precedent.

The state sued a group of online retailers after the law was enacted to force them to collect the state sale taxes, with the aim of overturning the precedent.

South Dakota e-commerce sale tax fight reaches U.S. Supreme Court
 

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