In a highly anticipated decision issued today, the Supreme Court overruled decades of its own precedent and held that states can require out-of-state retailers to collect and remit sales tax proceeds, even if the business has no physical presence in the state.  The Court’s decision in South Dakota v. Wayfair, No. 17-494 (2018), could have a significant impact on retailers who sell goods or services through the internet, as states rush to enact legislation forcing online sellers to collect and remit sales tax for transactions within those states.

The case was a challenge by Wayfair and other on-line retailers to a South Dakota law requiring large out-of-state sellers to collect and remit sales tax as if the seller had a physical presence in the state.  In two previous cases – National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967) and Quill Corp. v. North Dakota, 504 U.S. 298 (1992) the Supreme Court had ruled that states could not require sellers to collect and remit sales taxes if they had no physical presence in the state.  In those situations, states were forced to rely on their residents to voluntarily pay sales tax owed on purchases.  The Court noted that consumer compliance is as low as 4%, causing states to lose as much as $33 billion in combined sales tax revenue every year.

Referring to the “internet revolution” and the modern dynamics of the national economy, Justice Kennedy writing for a majority of the Court overruled Bellas Hess and Quill, finding that the rule in those cases amounted to a judicially-created tax shelter for businesses with no physical presence in a state.  The Court noted that modern e-commerce does not analytically align with a test based on the physical location of brick-and-mortar stores.  Instead of the physical location test, the Court concluded, to be subject to a state’s tax, there must be a “substantial nexus” between the state and the taxed activity.  Just how substantial a nexus remains to be seen and will likely result in future litigation.

The dissenting opinion, authored by Chief Justice Roberts and joined by Justices Breyer, Sotomayor, and Kagan, agreed that the Court’s older decisions were wrong, but contended that Congress, not the Court, should fix the problem and determine the extent to which states may burden interstate sellers with the duty to collect sales or use taxes.