On Thursday, June 21st in a 5-4 split decision with Chief Justice Roberts writing the dissent, the U.S. Supreme Court ruled that states can impose sales tax on internet purchases even where the retailer has no physical presence in the state. In doing so, the Court overturned over 50 years of precedent in the form of two of its prior decisions which previously restricted states from imposing sales tax on retailers lacking a physical connection to the state.
The case, South Dakota vs. Wayfair, involved a challenge to that state’s sales tax law which imposes a sales tax obligation on online retailers or remote sellers with more than $100,000 of sales to consumers in the state or engagement in 200 or more transactions involving the delivery of goods or services into the state. None of the companies involved in the case: Wayfair, Overstock.com, and Newegg, had any physical presence in the state.
The milestone decision signals judicial recognition of e-commerce as falling within the purview of a state’s taxing jurisdiction and closes a loophole retailers with pure online presence previously enjoyed. The Court noted in its opinion that “each year the physical presence test has become further removed from economic reality.”
Retailers with online presence must be especially vigilant as to state sales tax laws. Moreover, given the outcome of the decision, other states may move toward similar legislation where they have not done so already.
The case also sends a clear message that the U.S. Supreme Court is evolving in its interpretation of the commerce clause and states’ rights to tax moving toward standards that analyze economic connections to a given state and away from factors that hinge on physical presence in a state. Businesses should review their activities for compliance with state tax laws.
For more information, consult your Janover Tax Advisor.
Contributed by: Magda Szabo, CPA, JD, LL.M.