Supreme Court Allows States To Collect Tax From Online Sales

Image of man paying for online purchase with credit card on smart phone

States can now require online retailers to charge sales tax to consumers, even if the business doesn’t have a physical presence in the state.

The Supreme Court of the United States made a 5-4 decision and overturned past rulings in the case South Dakota v. Wayfair on June 21, 2018.


What was the old sales tax rule?

In 1992, the Supreme Court decided that the Constitution prevented states from requiring businesses to collect sales tax if the business didn’t have a substantial connection to the state.

Essentially, businesses had to collect sales tax if they had a physical presence in a state – like an office or warehouse. If they didn’t have a physical presence, they could sell products to consumers without sales tax. They didn’t have to follow state and local tax codes.

Today’s e-commerce landscape is remarkably different than it was in 1992. Online retailers have had the ability to sell products nationwide without collecting sales tax or remitting tax to states.

States argue that they’ve lost much-needed sales tax revenue. Brick and mortar stores claim they’re at a competitive disadvantage because they’re required to collect sales tax.

Justice Anthony Kennedy stated in the court’s majority opinion, “In 1992, it was estimated that the States were losing between $694 million and $3 billion per year in sales tax revenues as a result of the physical presence rule. Now, estimates range from $8 to $33 billion.”


What’s changed?

States may now require online retailers to charge sales tax to consumers even if they don’t have a physical presence in a state.

We don’t know how states will choose to enforce this ruling, but 21 states have adopted legislation that’s consistent or similar to South Dakota’s legislation. If vendors don’t have a physical presence in South Dakota, but have 200 transactions in a year or have in-state sales of $100,000 or more, the state can require them to collect sales tax.

Although South Dakota won its case before the Supreme Court, the case was sent back to the South Dakota Supreme Court to look at a few other issues. We anticipate South Dakota will begin enforcing this statue with regard to businesses that lack physical presence in South Dakota by September or October 2018 – not just online retailers.

Congress may also enact legislation to govern how states can enforce this decision. At this time, Congress hasn’t taken any action.


What does this mean for consumers?

If you’re shopping online, you might pay more. You’ll probably see sales tax added to your purchase total at some point in the future.

On the bright side, states can avoid auditing its citizens in order to collect unpaid use tax on online purchases.


What should I do if I’m an online retailer?

This decision can pose some significant challenges for you, especially if you’re a small business. You’ll have to comply with the sales tax laws in states and cities that you may never visit.

 It may be too soon to act, but keep these points in mind.

  1. If you receive any state notices regarding sales and use tax nexus, seek immediate assistance.
  2. Watch for any guidance and limitations issued by Congress.
  3. Evaluate how you will meet this upcoming requirement and make any necessary changes. Pay special attention to your accounting software’s capabilities.
  4. Be prepared. You may have to file sales tax returns for multiple states. You’ll need to know what is and isn’t taxable.


We’re still waiting to see how Congress and many states will react to this ruling. We’re committed to monitoring this issue and communicating any new developments with you.


Have questions about how this decision impacts your business? Let’s talk!