The Supreme Court ruled today, in South Dakota v. Wayfair, that states can now require online retailers to collect sales taxes even in states where the retailers have no physical presence, overturning 25 years of Supreme Court jurisprudence.
Since 1992, following the Supreme Court’s decision in Quill Corporation v. North Dakota, many online retailers had been exempt from charging sales tax on the grounds that the Constitution prohibits states from requiring retailers to charge sales tax unless those retailers have a substantial connection to the state. The court, in a 5-4 decision written by Justice Kennedy, overruled Quill, finding that the Quill decision had distorted the national economy, deprived states of annual tax revenues of between $8 billion and $33 billion, and put retailers relying on physical presence at a competitive disadvantage.
The case centered on three online retailers—Wayfair, Overstock.com, and Newegg—that had failed to comply with a South Dakota law requiring all merchants to collect a 4.5% sales tax if they had more than $100,000 in annual sales or more than 200 individual transactions in the state. The retailers argued that, because they have no property or employees in South Dakota, under Quill, they were not required to pay the South Dakota tax.
Justice Kennedy, who in 2015 described Quill as “questionable even when decided,” wrote today that the world has changed since 1992, with remote sales increasing from $180 million of mail-order sales in 1992 to $453.5 billion in online sales alone in 2017. Justice Kennedy, joined by Justices Thomas, Ginsburg, Alito and Gorsuch, declined to follow the Quill rationale and found that South Dakota’s law was not a burden on interstate commerce because it had been designed to prevent discrimination, contained certain safe-harbor provisions, and was simple, direct and uniform in application. Justice Kennedy did, however, note that state tax regulations would not be upheld if they did impose an undue burden on interstate commerce.
Chief Justice Roberts, with Justices Breyer, Sotomayor, and Kagan, dissented, arguing that although Quill and other cases in the area had been wrongly decided, the matter should be left to Congress due to the important role that e-commerce currently plays in the national economy and the risks that might arise out of altering the rules applicable to e-commerce.
Justice Kennedy’s opinion did not determine whether states may seek sales tax retroactively or whether all transactions, even if small or sporadic, could support state taxation of an online retailer. The Supreme Court also did not articulate specific requirements for a state law taxing online sales to pass constitutional muster, leaving the status of the 30 other states that have laws taxing online sales in doubt.
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