On June 21, breaking with nearly half a century of legal precedent, the U.S. Supreme Court ruled 5-4 in South Dakota v. Wayfair, Inc. that online retailers may now be required to collect sales tax in states where they do not maintain a physical presence. The implications of the court’s decision are monumental, since this opens the door for every state with a sales tax (45) to follow in South Dakota’s footsteps and require online retailers to collect tax. According to a December 2017 Government Accountability Office report, this could amount to over $13 billion in revenue for states.
The road to repealing the Court’s 1967 Bellas Hess v. Illinois and 1992 Quill v. North Dakota decisions has been long. In Quill, the Supreme Court limited a state’s ability to collect sales tax to retailers with a physical presence (e.g., a warehouse or store) in the taxing jurisdiction. Quill followed the Bellas Hess decision in which the Supreme Court determined that states cannot tax mail order companies for in-state sales, unless they maintained a physical presence in the state.
In 2015, nearly 50 years after Bellas Hess, Justice Kennedy issued an invitation to revisit both these cases, signaling a potential shift in the court’s opinion. In Direct Marketing Association v. Brohl, Justice Kennedy noted that in light of technological and social changes that have taken place in an increasingly interconnected economy, the Supreme Court should reconsider its previous decisions. Justice Kennedy also recognized the negative financial repercussions for states as a result of potentially outdated decisions in both these cases.
In Wayfair, the majority recognized that a physical presence requirement puts traditional brick-and- mortar companies at a disadvantage since they still have to collect sales tax, though online sellers do not. It also recognized that the physical presence requirement imposes an arbitrary standard on sales tax collection – while sellers with a pervasive Internet presence and a large customer base in-state were not required to collect sales tax, businesses with only a few items of inventory in the state were still subject to sales tax requirements.
Of course, the dissent took a different view, noting that this is more of a policy issue for Congress to take action. While the justices may have hoped that Congress might resolve the situation for states and online retailers, most sales tax collection bills have repeatedly failed. In 2013, the Senate passed the Marketplace Fairness Act, but the House did not act on the bill. More recently, earlier this year, Rep. Kristi Noem (R-SD) unsuccessfully pushed for the passage of the Remote Transactions Parity Act in the House.
Given the Supreme Court decision in Wayfair there is now additional pressure on Congress to act. Without congressional action, retailers may face a myriad of state sales tax collection statues, creating major administrative burdens, especially for small sellers. In the coming months, many online retailers will place increasing pressure on Congress to create a uniform set of rules in this space. However, given Congress’ other priorities, the chances of passing a bill remain remote.