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Supreme Court Rules That States Can Tax Online Retailers Without Physical Presence

Chris Gaetano
Published Date:
Jun 21, 2018
iStock-922171778 SCOTUS United States US Supreme Court

The Supreme Court of the United States, in a 5-4 ruling, declared that state governments can tax online retailers even if there's no physical presence in the state, according to the New York Times. The case, South Dakota vs. Wayfairoverturns the previous 1992 case, Quill vs. North Dakotawhich had determined that the Constitution's commerce clause prohibits a state from collecting sales tax from a retailer with no physical presence in that state. Since then, however, e-commerce has gone from a novelty to a multibillion-dollar industry. Data from the Federal Reserve Bank of St. Louis shows that e-commerce has grown from 0.6 percent of all retail sales in 1999 to 9.1 percent, as of the end of 2017. 

In 2016, South Dakota enacted legislation providing that an out of state seller has nexus with the state for sales tax purposes if: (1) the company's gross revenue from sales into the state exceeds $100,000 in the previous or current calendar year; or (2) the company sold to South Dakota purchasers in 200 or more separate transactions. This law completely ignored the precedent set by Quill, though this was by design, as the legislation was written specifically to prompt a court challenge.

South Dakota argued that, in our modern world, the physical-presence test is no longer applicable to today's economy. It further argued that online sales tax will not be difficult to collect, and there is no danger of retroactive taxation. Wayfair, along with co-respondents Newegg and Overstock, argued that that overturning Quill would present an excessive compliance burden for online sellers, especially given that they would need to deal with the widely varying laws of multiple jurisdictions at once. 

Justice Anthony Kennedy, writing the majority opinion, agreed with South Dakota. 

"When the day-to-day functions of marketing and distribu­tion in the modern economy are considered, it is all the more evident that the physical presence rule is artificial in its entirety. Modern e-commerce does not align analytically with a test that relies on the sort of physical presence defined in Quill," he said. Joining him in the opinion were justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito and Neil Gorsuch.

Chief Justice John Roberts, who wrote the dissent, said he was loathe to overturn multiple precedents on this matter, and warned that the court's decision could actually hamper the legislative solution he felt was more appropriate.

"Nothing in today’s decision precludes Congress from continuing to seek a legislative solution. But by suddenly changing the ground rules, the Court may have waylaid Congress’s consideration of the issue. Armed with today’s decision, state officials can be expected to redirect their attention from working with Congress on a national solution, to securing new tax revenue from remote retailers," he said.  Joining him on the dissent were justices Stephen Breyer, Sonia Sotomayor and Elena Kagan.

The GAO estimated in a recent report that if states were able to tax all online sales from remote sellers, then they would collect $8 billion to $13 billion in additional revenues, though it warned that the sales tax could impose compliance costs on businesses. 

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