Supreme Court Broadens Sales Tax Obligations on Online Retailers

By Sarah Wirskye - On

In South Dakota v. Wayfair, 138 S. Ct. 2080 (2018), the Court held that states can require internet retailers to collect sales taxes in states where they have no physical presence. The 5-4 opinion was written by Justice Kennedy, and Justices Thomas, Ginsburg, Alito and Gorsuch joined the majority opinion. President Trump, who has previously accused Amazon of avoiding taxes, tweeted that the decision was a “great victory for consumers and retailers.”

The law previously generally required a physical presence.  Brick-and-mortar businesses complained that they were at a disadvantage because they had to charge sales tax and many online competitors did not.

State and local governments also lost money, as consumers bought more and more online. South Dakota responded to the rise in online sales by enacting a law that required all merchants to collect sales tax if they had more than $100,000 in annual sales or more than 200 transactions in the state.

The Court explained the Commerce Clause principles and their application to state taxes.  First, it stated that two primary principles mark the boundaries of a State’s authority to regulate interstate commerce: State regulations may not discriminate against interstate commerce; and States may not impose undue burdens on interstate commerce. Second, they also animate Commerce Clause precedents addressing the validity of state taxes, which will be sustained so long as they (1) apply to an activity with a substantial nexus with the taxing State, (2) are fairly apportioned, (3) do not discriminate against interstate commerce, and (4) are fairly related to the services the State provides.

The Court further held that the physical presence rule has long been criticized as giving out-of-state sellers an advantage. Each year, it becomes further removed from economic reality and results in significant revenue losses to the States. The Court overruled its decision in its 1992 opinion Quill Corporation v. North Dakota, holding that the Constitution bars states from requiring businesses to collect sales tax unless they have a substantial connection to the state.

The Court also stated that stare decisis can no longer support the Court’s prohibition of a valid exercise of the States’ sovereign power. Therefore, the inquiry is whether the tax applies to an activity with substantial nexus with the taxing state.  In South Dakota’s case, the nexus was sufficient because the law only applied to sellers who engage in a significant quantity of business with the state.

While the change in the law will certainly make it burdensome for retailers who now have to navigate complex state and local tax codes, South Dakota argued that online sellers are no longer small companies competing with more established businesses. For example, Amazon had $119 billion in revenue last year, making it bigger than most traditional retailers.

However, many larger retailers, including Amazon, are already collecting sales taxes in most states. Therefore, it is possible that small and mid-size online retailers will be impacted the most.  Moreover, larger states where many online retailers also have a physical presence may not see a substantial increase in revenue.  Finally, the Court did not decide whether states may seek sales taxes retroactively. Nevertheless, both state and local governments and brick-and-mortar stores welcomed the Court’s opinion based on the dramatic increase in online shopping.

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