Legislation

U.S. Supreme Court Rules That States May Collect Taxes From Online Retailers

The days of buying tax-free cigars online may be numbered
Jun 21, 2018 | By Andrew Nagy
U.S. Supreme Court Rules That States May Collect Taxes From Online Retailers

If you’re like many cigar smokers, chances are you’ve purchased cigars from an online retailer at some point, without having to pay sales tax. Those days could soon be over. The U.S. Supreme Court decided today to grant states the authority to require online retailers to collect sales tax, overturning two decades of precedent and giving brick-and-mortar cigar retailers a much needed boost.

Today’s Supreme Court ruling in South Dakota v. Wayfair, decided by a slim 5–4 vote, upheld a South Dakota law that requires certain out-of-state retailers, including online stores, to collect sales tax. Justice Anthony Kennedy wrote the majority opinion, joined by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito, and Neil Gorsuch. Chief Justice John Roberts dissented, writing that the decision should be left to Congress, along with Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan.

The decision overturns precedent set in a 1992 case called Quill v. North Dakota that prevented states from collecting sales taxes from retailers that don’t have a physical presence within its border. In his South Dakota v. Wayfair opinion, Justice Anthony Kennedy overturned the landmark Quill case, saying that the decision was “unsound and incorrect” when it was decided. Additionally, the majority said that in today’s world of e-commerce, the Quill case, which involved mail-order catalogs, was obsolete.

“A virtual showroom can show far more inventory, in far more detail, and with greater opportunities for consumer and seller interaction than might be possible for local stores,” wrote Kennedy. 

It is still unclear how exactly this ruling will affect cigars and how they are purchased. Currently, 31 states already have laws that tax Internet sales. This includes, as of this year, Pennsylvania, home to major online cigar retailers Cigars International, JR Cigars and Famous Smoke Shop.

Currently, Pennsylvania’s law requires companies that do at least $10,000 worth of online sales to register with the state to determine how they handle sales tax. They have two options: They can collect and remit sales taxes at the point of sale and then make monthly payments to the state; or the businesses can opt to send annual tax notices to their customers about each item purchased in the state, leaving the customer to handle the tax payments in their tax filings.

On the other hand, South Dakota’s online tax law requires retailers with more than $100,000 in annual sales, or 200 transactions in the state, to pay a 4.5 percent tax directly to the state.

In his majority opinion, Justice Kennedy praised the South Dakota law for not imposing “undue burdens” on interstate commerce. This means that states will likely revisit their online tax codes to model them after South Dakota’s in order to avoid future litigation.

“It’s important for all retailers to understand that a lot of the work still has to be done,” said Daniel Trope, senior director of federal government affairs for the International Premium Cigar & Pipe Retailers association. “IPCPR applauds the decision to create equity or fairness in the marketplace.”

Still, brick-and-mortar cigar retailers celebrated today’s Supreme Court decision, as they believe it will create a more level playing field.

“Brick and mortar is the entry-level tasting channel for our manufacturing partners,” said Craig Cass, owner of the Tinder Box of the Carolinas retail stores. “Consumers come in and touch, feel and taste our cigars. One of the biggest challenges for our industry is the opportunity to enjoy the product. We have less places to enjoy these great brands our manufacturers are making, and so if [today’s decision] can help brick and mortars stay viable, it could be a positive ruling for the industry.”

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