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US Supreme Court rules against e-commerce companies in tax case

Local governments in the US are now able to force online retailers to collect sales tax on purchases made in states where they have no physical presence, echoing the Australian government’s move to ‘level the playing field’ through the implementation of GST on low-value imports.

In a 5-4 ruling on Thursday, the highest court in the US backed a South Dakota law enacted in 2016, which required out-of-state e-commerce companies to collect sales tax if they generated $100,000 or more in sales, or conducted 200 separate transactions in the state.

The law was challenged by online furniture and homewares business, Wayfair, on the basis of a 1992 ruling, which barred states from forcing businesses with no local physical presence in the state to collect state sales tax.

This created a legal loophole benefitting online retailers in particular, since they could offer consumers an overall lower price on items than their bricks-and-mortar competitors.

The reversal of the 1992 ruling is being praised as a win for ‘main street’, that is, traditional bricks-and-mortar retailers, which have struggled to compete with the increased choice and attractive prices offered by e-commerce companies, leading to record closures in recent years.

Indeed, pureplay online retailers, including Ebay, Etsy, Overstock, Wayfair and Amazon, saw their share prices fall on Thursday, following the decision.

Small online businesses are expected to suffer most, as they face the increased cost and complexity of collecting various state and local taxes.

And while the ruling has immediate implications only for online retail sales in the state of South Dakota, other states in the US – 45 of which collect state sales tax – are now expected to introduce similar laws.

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