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Supreme Court Rules States Can Collect Sales Tax From Online Retailers

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With sales by online retailers accounting for an increasing share of consumer spending, the U.S. Supreme Court has handed states a major victory in their efforts to boost revenue from sales tax.

In a 5 to 4 ruling published Thursday, the Supreme Court sided with South Dakota in a case against online retailers Wayfair (W), Overstock.com (OSTK) and Newegg.

The opinion authored by Justice Anthony Kennedy overturns a 1992 Supreme Court ruling that prevented states from forcing businesses with no "physical presence" in that state to collect sales taxes.

Joined by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito and Neil Gorsuch, Kennedy determined that the high court's previous decisions were flawed.

"Each year, the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the States," Kennedy wrote.

He added, "These critiques underscore that the physical presence rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause."

A report published by the General Accountability Office last year found that states could have collected up to $13.4 billion in additional online sales taxes in 2017.

Online retail giant Amazon (AMZN) already collects sales tax in most states due to its large network of warehouses, although the ruling could have a significant impact on smaller online retailers.

Chief Justice John Roberts wrote the dissenting opinion, arguing that overturning the physical presence rule should be left to Congress.

"E-commerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical-presence rule," Roberts wrote.

He added, "Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress."

Roberts, who was joined by Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan, said the court should not act on this important question of current economic policy solely to correct a mistake made over 50 years ago.

President Donald Trump's administration had sided with South Dakota in the case, and the president has repeatedly attacked Amazon on Twitter over the issue of sales tax collection.

The ruling specifically dealt with a South Dakota law but could lead other states to pass legislation seeking to collect sales tax from online retailers.

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