By Lawrence Hurley
WASHINGTON (Reuters) - States may force online retailers to collect potentially billions of dollars in sales taxes, the U.S. Supreme Court said in a major ruling on Thursday that undercut an advantage many e-commerce companies have enjoyed over brick-and-mortar rivals.
In a 5-4 ruling upholding a South Dakota law challenged by Wayfair Inc, Overstock.com Inc and Newegg Inc, the justices overturned a 1992 high court precedent that had barred states from requiring businesses with no "physical presence" there, like out-of-state online retailers, to collect sales taxes.
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Shares of online retailers fell sharply following the ruling, which opened the door to a new revenue stream to fill state coffers - up to $13 billion annually, according to a federal report. Because many e-commerce companies do not collect state sales taxes on purchases, they have had an advantage over brick-and-mortar businesses that do collect it.
Wayfair was down 2.7 percent and Overstock off 1.6 percent. Shares of Etsy Inc and eBay Inc, which provide platforms for small retailers to sell their wares, were off 2.7 percent and 1.8 percent, respectively.
The ruling is likely to lead other states to try to collect sales tax on purchases from out-of-state online businesses more aggressively. Forty-five of the 50 states impose sales taxes on purchases. It also likely will lead to many consumers paying more at the online checkout.
The ruling comes against a backdrop of President Donald Trump's criticism of Amazon.com Inc, the leading player in online retail, on the issue of taxes and other matters. South Dakota was backed by the Trump administration in the case.
Amazon, which was not involved in the Supreme Court case, collects sales taxes on direct purchases on its site but does not typically collect taxes for merchandise sold on its platform by third-party vendors, representing about half of total sales. The ruling means that states may now seek to tax more of those sales, Moody's analyst Charlie O'Shea said.
Amazon shares fell as much as 1.9 percent before paring losses. The stock was last off 0.7 percent and was among the biggest drags on the benchmark S&P 500 stock index.
Even before the ruling, Pennsylvania and Washington state had passed laws that would require Amazon to collect sales tax on items sold by third-party vendors.
Trump has bashed Amazon CEO Jeff Bezos, who also owns the Washington Post, a newspaper that the Republican president has disparaged for its coverage of him.
"U.S. consumers are extremely savvy, and there will always be competition for the consumer. It's clear that (retailers) are going to try to incorporate increases in the prices to pass along the higher costs to the consumer," said Quincy Krosby, chief market strategist at Prudential Financial in Newark, New Jersey.
'DEFEND MAIN STREET'
The court, in a ruling authored by conservative Justice Anthony Kennedy, revived a 2016 South Dakota law that required larger out-of-state e-commerce companies to collect sales tax, a mandate that the online retailers fought in court.
The South Dakota law, enacted in 2016, required out-of-state online retailers to collect sales tax if they amass $100,000 in sales or 200 separate transactions.
"This is a great day for South Dakota. We have long fought the battle to defend Main Street businesses and now with today's ruling, all businesses will compete on a level playing field," said South Dakota Republican Governor Dennis Daugaard.
"Rejecting the physical presence rule is necessary to ensure that artificial competitive advantages are not created by this court's precedents," Kennedy said.
The law could yet face legal challenges on other grounds, Kennedy noted.
The win was welcomed by groups representing brick-and-mortar retailers and decried by e-commerce advocates.
The ruling puts an end to a legal regime that "distorts free markets and puts local brick and mortar stores at a competitive disadvantage with their online-only counterparts," said Deborah White, general counsel of the Retail Industry Leaders' Association.
Small online businesses will be the hardest hit, said Chris Cox, a lawyer for e-commerce industry group NetChoice.
"Consumers will quickly feel the negative effects as those businesses dry up or are forced into the arms of Internet giants," he added.
Most states would need to pass legislation before seeking to collect the additional taxes, although some have already enacted laws or regulations similar to South Dakota's.
South Dakota has estimated that it could take in up to $50 million a year in additional revenue with these taxes being collected.
States like South Dakota that depend heavily on sales taxes for their revenue are likely to benefit most, with a predicted maximum revenue increase of around 3 percent, according to a Barclays research note.
The states that are likely to see the biggest percentage increase in revenue are Louisiana, Tennessee, South Dakota, Oklahoma and Alabama, according to the Barclays research.
Kennedy wrote that the 1992 precedent that affirmed that a physical presence is required - a case called Quill v. North Dakota - was "flawed on its own terms" and was especially problematic due to the rise of internet retail.
In the digital era, the costs of complying with different tax regimes "are largely unrelated to whether a company happens to have a physical presence in a state," Kennedy wrote.
(Reporting by Lawrence Hurley; Editing by Will Dunham)