On June 21, 2018, the United States Supreme Court ruled in a 5-4 decision in South Dakota v. Wayfair, Inc., et al, that states can require out-of-state sellers to collect and remit sales tax on sales to in-state consumers even if the seller has no physical presence in the consumer’s state. In doing so, the Court overruled 50 years of its own precedent. The decision allows states to define a sales threshold (either by dollar amount or the number of transactions) which will trigger this collection requirement. Before Wayfair, businesses with no employees or property in a state (i.e., no physical presence) were not considered to have sales tax “nexus” and therefore had no requirement to collect and remit tax on these sales. Instead, the consumer was responsible for reporting and self-remitting a use tax to the state at the same rate on those purchases – a scenario which unsurprisingly led to fewer tax dollars being collected by the state. As a result, many state governments asserted that they were being unfairly hindered in their ability to collect taxes on these sales. Likewise, many in-state taxpayers complained that they were being undercut by out-of-state remote sellers that were not required to collect the same sales taxes they were.
In a move to bring the issue to a head, South Dakota enacted a law in 2016 which required sellers that deliver more than $100,000 of goods or services into the state or engage in 200 or more separate transactions for the delivery of goods or services into the state on an annual basis, to collect and remit sales tax on all taxable sales into the state. Online retailer Wayfair challenged this law as being contrary to established Supreme Court precedent and unconstitutional. In ruling in favor of South Dakota, the Court held that its prior rulings on the matter, some of which dated back to the mid-1960’s and required the seller to have in-state physical presence before it could be required to collect sales tax, were outdated and effectively caused market distortions with modern technology giving an advantage to e-commerce and out of state retailers over dealers with in-state locations.