Supreme Court Rules Physical Presence Not Needed for Sales Tax Collection Obligation

In a sweeping decision, the United States Supreme Court has ruled that states may require out-of-state retailers, including online sellers, to collect and remit state sales tax on sales made to in-state consumers, even if the seller has no physical presence in the state (that is, no brick-and-mortar locations, warehouses, headquarters, employees, independent contractors, etc.). While many large online retailers already collect sales tax, this decision likely will reshape the competitive landscape for smaller online sellers and for technology companies selling software products by subjecting these retailers to sales tax in a growing number of states.

In South Dakota v Wayfair, Inc., the United States Supreme Court, in a 5-4 decision, overturned its prior decisions that required a business to have a physical presence in a state before that state could require the collection of sales tax by that business. Instead, the Court held that a retailer can have “substantial nexus” based on economic presence. The South Dakota law at issue in Wayfair applies to a seller without physical presence in the state that has in-state sales of goods or services of more than $100,000 or engages in 200 or more separate in-state transactions. In anticipation of potential Congressional or judicial action to overturn the Court’s prior decisions, several other sales-tax states enacted similar laws. Although Wayfair does not resolve all issues related to these laws, and specifically notes that Commerce Clause doctrine questions remain, Wayfair establishes that lack of physical presence no longer is an impediment.

Whether state law requires the out-of-state online retailers to collect sales tax must be determined on a state-by-state basis, including potential application of the matters not resolved by Wayfair. We anticipate that there will be a rush by states that do not currently require out-of-state retailers to collect sales tax to enact legislation to expand their tax collecting power and for those with such laws to review them in light of Wayfair. We will continue to monitor the state sales tax implications of the Wayfair decision as they develop. If you have any questions, please contact, one of the key contributors to this alert.