Supreme Court Holds That States Can Require Internet Retailers To Collect Sales Taxes

June 21, 2018

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South Dakota v. Wayfair, Inc., No. 17-494 

Decided June 21, 2018

Today, the Supreme Court held 5-4 that States may require internet retailers to collect sales taxes on online purchases.

Background:
In Quill Corp. v. North Dakota, 504 U.S. 298 (1992), the Supreme Court reaffirmed that States could not require catalog retailers to collect sales taxes if the retailers were not physically present in the State.  In a 2015 concurrence, Justice Kennedy urged the Court to reconsider Quill because it inflicted “extreme harm and unfairness” on States unable to tax the ever-growing number of online transactions.  That urging spurred multiple States, including South Dakota, to require internet retailers to collect sales taxes notwithstanding their lack of a physical presence in the State.  South Dakota then sued a number of internet retailers for not collecting sales taxes.

Issue:
Whether the Court should overrule Quill’s physical presence requirement and allow States to require retailers to collect sales taxes, even if the retailer is not physically present in the State.

Courts Holding:
States may require the collection of sales taxes by retailers with no physical presence in the State.

“In the name of federalism and free markets, Quill does harm to both. The physical presence rule it defines has limited States’ ability to seek long-term prosperity and has prevented market participants from competing on an even playing field.”

Justice Kennedy, writing for the majority

What It Means:

  • The Court overruled Quill because its physical presence rule was unnecessary to satisfy due process or the Commerce Clause’s requirement that state taxes not “unduly burden” interstate commerce.  The Court observed that “Quill has come to serve as a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a State’s consumers,” and that the “Internet revolution” has only made Quill’s rule “further removed from economic reality.”
  • Still, under the Commerce Clause, States may tax only those activities that have a “substantial nexus” to the State.  The Court held that South Dakota’s tax satisfied that test because it applied only to retailers that delivered more than $100,000 of goods in the State or engaged in more than 200 transactions in the State.
  • South Dakota, and the other States that have passed similar tax laws, will now require internet retailers to charge sales taxes on online purchases.  States lost between $8 and $33 billion in sales taxes every year under the old physical presence rule.
  • More States may now require internet retailers to collect sales taxes.  These States may also change alternative tax provisions that they had enacted to make up for sales-tax shortfalls from internet retailers under Quill.

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