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July 2018

Supreme Court Decides Internet Sales Tax Case, Allowing States to Charge Sales Taxes on Online Purchases

On June 21, 2018, the U.S. Supreme Court issued its long awaited decision, South Dakota v. Wayfair, U.S., No. 17-494, granting states greater power to require out-of-state retailers to collect sales tax on online sales to in-state residents. At issue was the Court’s own 26-year-old precedent, Quill v. North Dakota, 504 U.S. 298 (1992), which established the physical presence test for sales and use tax nexus. Modern e-commerce “does not align” with the physical presence required in Quill, Justice Kennedy wrote. The decision is the most important state tax case in more than two decades.

Decided by a 5-4 vote, the Wayfair decision upholds South Dakota’s digital sales tax statute, enacted in March 2016, which requires out-of-state remote sellers with 200 or more sales transactions or annual in-state sales in excess of $100,000 to collect and remit sales tax from such sales to South Dakota even if such sellers had no employees or real estate in the state. The South Dakota law first worked its way to the state circuit court and then to the South Dakota Supreme Court when South Dakota sought to enforce the law against three large online retailers, Wayfair Inc., Inc., and Newegg Inc. The South Dakota Supreme Court, relying on Quill, ruled for the sellers. South Dakota filed a petition for a writ of certiorari with the Supreme Court, which the Supreme Court granted on January 12, 2018, leading many tax experts to believe that Quill would be overturned.

For 26 years, Quill set the standard for how states tax online purchases, prohibiting states from imposing sales tax collection obligations on businesses if the businesses lacked an in-state physical presence. Overruling Quill, Justice Kennedy wrote: “The Supreme Court is saying that technology has changed so dramatically that Quill and National Bellas Hess are basically anachronisms.” National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967) is a 1962 case prohibiting a state from requiring a seller to collect use tax on sales by mail to customers in the state. Justice Kennedy further articulated that the physical presence rule of Quill is “unsound and incorrect” and that the court’s decisions in Quill and National Bellas Hess are thus now overruled.

A significant part of the Court’s discussion focused on the Commerce Clause, and more specifically, the doctrine of the “dormant” Commerce Clause, which generally stands for the idea that the federal government is the only governing body that can regulate interstate commerce and that the Constitution empowers courts to invalidate state laws that have a negative effect across state boundaries. In a rather detailed analysis, the Supreme Court concluded that the South Dakota statute is not an undue burden on interstate commerce:

“[S]outh Dakota’s tax system includes several features that appear designed to prevent discrimination against or undue burdens upon interstate commerce. First, the Act applies a safe harbor to those who transact only limited business in South Dakota. Second, the Act ensures that no obligation to remit the sales tax may be applied retroactively (. . .). Third, South Dakota is one of more than 20 States that have adopted the Streamlined Sales and Use Tax Agreement. This system standardizes taxes to reduce administrative and compliance costs: It requires a single, state-level tax administration, uniform definitions of products and services, simplified tax rate structures, and other uniform rules. It also provides sellers access to sales tax administration software paid for by the State. Sellers who choose to use such software are immune from audit liability (. . .).”

The court also makes it clear, however, that more complex or overreaching laws might impose such a burden and thus must, and will be, scrutinized closely.

Joining with Kennedy were Justices Ruth Ginsburg, Clarence Thomas, Samuel Alito, and Neil Gorsuch. Justices Thomas and Gorsuch filed concurring opinions. Chief Justice Roberts, and Justices Elena Kagan, Sonia Sotomayor and Stephen Breyer, dissented from the majority, and argued that the issue of remote taxation should be decided by Congress: “I would let Congress decide whether to depart from the physical presence rule that has governed this area for half a century.” Critically, however, even the dissenters agreed that the in-state physical presence test was flawed on its own terms and that Quill was wrongly decided.

The Wayfair decision will undoubtedly have a monumental effect on commerce across the country, forcing internet retailers and third party sellers using platforms like, and others to collect and remit taxes to states in which they make sales above certain thresholds, and putting smaller local state businesses in a more competitive position with the online retail giants. The ruling is also potentially a huge win for states that have been losing out on billions of revenue dollars annually under the two decades-old Supreme Court decisions that limited online sales tax collection. However, how the states will implement the holding of Wayfair is unclear. While there is little doubt that all states that administer a sales tax will follow South Dakota, it is not clear whether they will do so by copying South Dakota’s law or revisiting internet sales laws they already have in effect to bring them as close to the South Dakota model as possible. On a practical level, the decision may lead to disparate tax policies, at least until Congress, and perhaps the states, work to enact uniformity in applying the Supreme Court’s holding. In addition, the Wayfair decision sets the stage for states to argue nexus on out-of-state retailers for income tax purposes. Whether the decision will negatively impact online shopping remains to be seen.

For more information regarding the Wayfair decision and how it may apply to your business and particular circumstances, please contact your CSG tax attorney or the authors listed below.

Sean M. Aylward | Vice Chair, Corporate & Securities Group | | 973.530.2105

Bozena M. Diaz | Counsel | | 973.530.2161


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