The US Supreme court has overturned a 1992 ruling that forced e-commerce companies to collect sales tax only in states where they had a physical presence. The 1992 court ruling in Quill v. North Dakota had held that a state could only require a business with a physical presence in a specific state to collect sales taxes on a purchase in that state. Fast forward 26 years later, the digital landscape has been transformed by the rise of e-commerce giants like Amazon. The federal government of South Dakota objected to the vast e-commerce sales by state residents going untaxed, and enacted a law requiring out-of-state sellers to collect taxes and pay them to South Dakota. The law, enacted in 2016, requires that e-commerce businesses making at least 200 sales or over $100,000 from sales of taxable goods or services in South Dakota are required to collect and remit a sales tax of 4.5 percent to the state.

Changed dynamics

Boston-based home goods e-commerce business Wayfair, which collects sales tax in 45 of the 50 states filed suit against the state of South Dakota to challenge the legality of its state tax law, taking the case all the way up to the Supreme Court. The 5-4 decision was written by Justice Anthony Kennedy, who was joined by Justice Ruth Bader Ginsberg, Samuel Alito, Neil Gorsuch and Clarence Thomas. John Roberts dissented along with liberals Stephen Breyer, Sonia Sotomayor and Elena Kagan. Justice Kennedy wrote: ‘The Internet's prevalence and power have changed the dynamics of the national economy,’ and, ‘each year, the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the states.’

Disparate outcome?

The ruling evens the playing field between online retailers and brick-and-mortar businesses that have long collected state sales taxes on purchases. Other states are likely now to try to collect sales tax on purchases from out-of-state online businesses more aggressively, but those who haven’t already will need to pass legislation before seeking to collect the additional taxes. The outcome could lead to disparate tax policies and new risks for small businesses, unless Congress moves to enact uniformity and protections.