NASHVILLE - The U.S. Supreme Court narrowly ruled Thursday that Tennessee and other states may require most online retailers to collect billions of dollars of sales taxes owed to them on purchases made by their home-state residents.
The 5-4 decision in a South Dakota case upended prior rulings in 1967 and 1992 dealing with out-of-state sellers and catalog mail order sales. It said states could not compel the companies to collect the sales taxes on products they shipped if they had no physical presence in a state such as a store, office or warehouse.
Officials react to Supreme Court decision
"We applaud the U.S. Supreme Court's decision in South Dakota v. Wayfair. This decision will help ensure fairness for Tennessee businesses and will specifically help local businesses compete on an even tax playing field with out-of-state online companies. We are currently reviewing the Court's decision and are considering next steps and what this means for Tennessee."- Gov. Bill Haslam"The Court's decision is good news for Main Street business and for states. It correctly leaves to states decisions about who should pay state sales and use taxes and how they should be collected. It stops the federal government from forcing states to prefer out-of-state businesses over Main Street. There still may be a need for Congress to act to adopt the simplified collection of sales tax procedures in the Marketplace Fairness Act that 69 United States senators voted for in 2013."- U.S. Senator Lamar Alexander"I think most Tennesseans would agree that we are fortunate not to have a state income tax, and to help ensure that remains the case, it is important our sales tax system works. Today's ruling is a win for states' rights and gives states like ours the ability to enforce existing state tax laws. It also levels the playing field between local brick-and-mortar businesses that pay property taxes and hire our local citizenry and out-of-state online retailers paying no sales tax."- U.S. Sen. Bob Corker
Customers still owed state and local governments the taxes, but most didn't pay. Under the decision, states can now make sellers collect the taxes.
Tennessee Gov. Bill Haslam on Thursday applauded the ruling.
"This decision will help ensure fairness for Tennessee businesses and will specifically help local businesses compete on an even tax playing field with out-of-state online companies, he said. "We are currently reviewing the Court's decision and are considering next steps and what this means for Tennessee."
Writing for the majority, Supreme Court Justice Anthony Kennedy said the prior decisions had been flawed. Kennedy had openly invited states several years ago in another ruling to push the case again given the explosion of online commerce.
That came after years of inaction by Congress to resolve complaints by state and local governments about the increasing losses of revenue to them as well as from brick-and-mortar retailers that online sales effectively granted internet companies an unfair government-sanctioned advantage over them.
After Kennedy's invitation to states to challenge the ruling, Haslam in 2016 joined other states in doing just that. The state revenue department issued a new rule requiring out-of-state sellers to collect sales taxes.
The rule, later approved by lawmakers here as part of an "omnibus" package of dozens of rules and regulations issued by various state agencies, has been held in abeyance pending the high court's decision.
It's unclear when that rule will take effect. Haslam's office has yet to comment on the ruling.
Tennessee Attorney General Herbert Slatery hailed the high court's ruling, calling the decision to let states collect sales tax from online retailers "welcome news."
Tennessee had joined a multi-state amicus brief in support of South Dakota that Slatery said in a statement "highlighted the importance of this source of revenue for the States and the unfairness of the previous rule to our local retailers.
"We will continue to review the decision and its impact on the pending case filed against the Tennessee Department of Revenue by the American Catalog Association," Slatery said.
The administration has previously estimated the state is losing out on some $450 million in sales tax money annually.
The decision is not expected to impact many sales by online sales giant Amazon, because it began collecting Tennessee sales taxes after it built warehouses in Chattanooga, Cleveland and in Middle Tennessee.
U.S. Sen. Lamar Alexander, R-Tenn., a former governor who had successfully pushed legislation in the Senate to allow states to require remote sellers to collect the sales tax, hailed the Supreme Court's decision to overturn the 26-year-old Quill decision that prevented states from enforcing state sales and use tax laws.
"The Court's decision is good news for Main Street business and for states," said Alexander, whose Senate bill never moved in the House. "It correctly leaves to states decisions about who should pay state sales and use taxes and how they should be collected. It stops the federal government from forcing states to prefer out-of-state businesses over Main Street."
But Alexander said he sees there still may be a need for Congress to step in and adopt a simplified collection of sales tax procedures under the Marketplace Fairness Act that 69 senators backed in 2013. It never made it out of a U.S. House committee.
U.S. Sen. Bob Corker, R-Tenn., called it a "win for Tennessee taxpayers" in a news release.
"I think most Tennesseans would agree that we are fortunate not to have a state income tax, and to help ensure that remains the case, it is important our sales tax system works," Corker stated. "Today's ruling is a win for states' rights and gives states like ours the ability to enforce existing state tax laws."
Dr. Bill Fox, who directs the University of Tennessee at Knoxville's Boyd Center for Business and Economic Research, said the ruling will level the playing field for brick-and-mortar companies.
"The tax benefit goes away for major [online] vendors," he said. "It was like the state imposed a tariff on local companies."
Another key result is that the state will collect more tax revenues, Fox said. But, he said, the state still will need to implement regulations to collect the taxes and "nothing happens tomorrow."
Fox added that the case before the Supreme Court involved larger companies, and small businesses may not have a tax collection responsibility.
With the ruling, Congress may now be inclined to act on the sales tax issue, he said.
The American Legislative Exchange Council, which lobbies state legislatures across the country, and other groups denounced the ruling in South Dakota v. Wayfair.
"[The] Supreme Court decision will harm America's innovators and small businesses. By permitting states to tax businesses outside of their borders, the Supreme Court's decision will usher in a new, unheralded period in interstate commerce," Jonathan Hauenschild, ALEC's counsel of record, said in a statement.
Hauenschild said "small businesses and innovators will be subject to over 12,000 taxing jurisdictions in the United States. They will face audits and compliance costs very few can comprehend."
Joel Griffith, director of the Center for State Fiscal Reform, denounced the ruling as well, charging it "threatens to stunt economic growth. More concerning, it marks a departure from a constitutional understanding of federalism."
He said many remote retailers are small businesses that may "may soon be forced to keep track of the thousands of taxing jurisdictions across the country, many with their own rates, bases, rules and regulations. Congress remains the only solution to this threat."
Contact staff writer Andy Sher at asher@timesfreepress.com or 615-255-0550. Follow him on Twitter @AndySher1.